Moral Hazard

Abstract

In an insurance context, moral hazard comprises the phenomenon that having insurance gives the insured an incentive to alter his behavior to the detriment of the insurer. This manifests itself by the insuree employing suboptimal precautionary effort to avoid the loss. We discuss the insurance‐specific moral hazard model and several extensions with regard to many effort levels, continuous loss distribution, multiperiod contracts, and renegotiation.