Lab meeting - Alexis Garapin (Université Grenoble Alpes)

Insurance and Moral Hazard: A Comparison of Private vs. Mutual Insurance

The moral hazard effect of insurance has been well understood since Arrow (1963) and Pouly (1968). In this paper, we compare the relative performance of private insurance and mutual insurance in settings where individuals allocate resources towards effort to prevent a group-level loss, the purchase of insurance to mitigate potential losses, and private investment in capital formation. In a laboratory experiment, we implement three treatments. In the baseline treatment, subjects allocate their initial endowment between a capital investment fund and investment in accident prevention, where preventing accidents depends on the collective investment of all subjects. We then consider treatments that introduce the option to buy insurance to reduce the magnitude of losses; treatment 2 mutual insurance and treatment 3 private insurance. The results indicate that purchasing insurance of either type results in a moral hazard problem that reduces investment in collective care; however, while purchasing mutual insurance does not significantly reduce capital investment, the purchase of private insurance significantly reduces capital formation. These results suggest a substitution patterns whereby a newly introduced private insurance product crowds out both private and public investment, while a newly introduced mutual insurance product crowds out only public investment. In the case of private insurance, we show that introducing insurance reduces social welfare. These results are robust to low and high values of the minimum loss probability.

Last modified: Thu, 30 Apr 2026 11:48:41 BST