Insurance Law and Economics: An Empirical Perspective

Abstract

The theory of insurance law and economics holds that the insured will display less care as a consequence of the insurance coverage. It also holds that bad risks are more likely than good risks to display demand for coverage. These behavioral predictions, which are associated with moral hazard and adverse selection respectively, are firmly embedded in rational choice theory. This paper reviews empirical findings and addresses the question how close insurance law and economics theory is to insurance reality. Indeed, it seems that insurance law and economics theory can be enriched by empiricism. Review of empirical evidence nuances some of the theoretical predictions and offers a proper occasion for investigating the policy implications. Both strands are explored.

Keywords: Insurance law and economics, adverse selection, moral hazard, propitious selection

JEL Classification: G22, K12, K19