Determination of Optimal Cap on Claim Settlements Based on the Criterion of Social Benefit Maximization
Posted: 10 Aug 2011
Date Written: August 10, 2011
Caps on claimed damages constitute one of the form of proposed reforms of the tort system, especially in the United States. In this work, we establish models to capture both claimant and insurer’s behaviors under the regime of caps on damages. We establish an objective function of maximizing the social benefit, expressed as the sum of claimant and insurer’s benefits. Optimum upper limit that balances both claimant and insurer’s benefits is examined and our results show that the optimal value of the upper limit should be the expected value of the random claim payment no matter what kind of probability distribution it follows.
Keywords: upper limit, social benefit, optimization
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