The Role of Memory in Long-Term Contracting with Moral Hazard: Empirical Evidence in Automobile Insurance
61 Pages Posted: 4 Aug 2005
Date Written: July 19, 2005
We test the efficiency associated with the role of memory in long-term contracting. Bonus-malus schemes in automobile insurance are examples of contracts that use memory. During the eighties different contributions showed how multi-period contracting under moral hazard improves resource allocation. It was also stressed that these models did not consider the possibility of savings. Consequently, it is not clear that introducing a bonus-malus scheme in automobile insurance will work efficiently to reduce moral hazard. Our empirical results show that the implementation of the new bonus-malus scheme in the Quebec automobile insurance industry reduced accidents and traffic violations. We use the Abbring et al. (2003a, 2003b) test to conclude that the reductions measure incentive effects for road safety.
Keywords: Memory, long-term contracting, moral hazard, empirical evidence, automobile
JEL Classification: D80, G22
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