Unformatted text preview: x ≥ -5000 and u ( x ) = 2 x + 5000 if x <-5000. (a) Find the insurance contract that the monopolist risk-neutral company will oﬀer this driver if there is no moral hazard (for example the company can enforce the customers to drive carefully). (b) What happens if the company oﬀers the same contract when moral hazard is possible? What is the minimal price that the company can charge for a contract with a zero deductible under moral hazard? (c) What is the proﬁt maximizing contract for the monopolist risk-neutral company under moral hazard? (d) What is the loss in the average proﬁt for the company that results from moral hazard? 5. Can you repeat these steps if the utility index is u ( x ) = log( x + 20000)?...
View Full Document
- Spring '09
- Utility, insurance company, $10000