The Role of Memory in Long-Term Contracting with Moral Hazard: Empirical Evidence in Automobile Insurance

61 Pages Posted: 4 Aug 2005

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Mathieu Maurice

HEC Montréal

Jean Pinquet

Université Paris X Nanterre

Charles Vanasse

TD Asset Management

Date Written: July 19, 2005

Abstract

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

Suggested Citation

Dionne, Georges and Maurice, Mathieu and Pinquet, Jean and Vanasse, Charles, The Role of Memory in Long-Term Contracting with Moral Hazard: Empirical Evidence in Automobile Insurance (July 19, 2005). Available at SSRN: https://ssrn.com/abstract=764705 or http://dx.doi.org/10.2139/ssrn.764705

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Mathieu Maurice

HEC Montréal ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Jean Pinquet

Université Paris X Nanterre ( email )

Room G301, Building G
92001 Nanterre Cedex, 92001
France

Charles Vanasse

TD Asset Management ( email )

1350 Rene-Levesque West
Suite 501
Montreal, Quebec H3G 1T4
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
234
Abstract Views
1,682
rank
128,491
PlumX Metrics