Outsourcing Regulation: How Insurance Reduces Moral Hazard

53 Pages Posted: 11 Apr 2012 Last revised: 17 Sep 2013

Omri Ben-Shahar

University of Chicago Law School

Kyle D. Logue

University of Michigan Law School

Date Written: November 1, 2012

Abstract

This article explores the potential value of insurance as a substitute for government regulation of safety. Successful regulation of behavior requires information in setting standards, licensing conduct, verifying outcomes, and assessing remedies. In some areas, the private insurance sector has technological advantages in collecting and administering the information relevant to setting standards, and could outperform the government in creating incentives for optimal behavior. The paper explores several areas in which regulation and other government-oriented forms of control are replaced by private insurance schemes. The role of the law diminishes to the administration of simple rules of absolute liability or of no liability, and affected parties turn to insurers for both risk coverage and safety instructions. The paper illustrates the existing role of regulation-through-insurance in various areas of risky activity, and then explores its potential application in additional, yet unutilized, areas: (1) consumer protection; (2) food safety; and (3) financial statements.

Suggested Citation

Ben-Shahar, Omri and Logue, Kyle D., Outsourcing Regulation: How Insurance Reduces Moral Hazard (November 1, 2012). Michigan Law Review, Vol. 111, No. 2, 2012; U of Michigan Law & Econ Research Paper No. 12-004; University of Chicago Institute for Law & Economics Olin Research Paper No. 593. Available at SSRN: https://ssrn.com/abstract=2038105 or http://dx.doi.org/10.2139/ssrn.2038105

Omri Ben-Shahar (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Kyle D. Logue

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734.936.2207 (Phone)

HOME PAGE: http://kylelogue.net

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