Pierre Picard

École Polytechnique · Département d'Economie

We analyze how pandemic business interruption coverage can be put in place by building on capitalization mechanisms and a portfolio management strategy. As evidenced with COVID-19, pandemics affect economic sectors in differentiated ways: some are very severely affected because their activity is heavily impacted by travel bans and constraints on wo...

Technology adoption is crucial for the development of low-income countries. This paper investigates how parametric insurance can contribute to improving access to finance, and hence to technology, for smallholder farmers. In a model with moral hazard, we show that bundling parametric insurance with loans may lower collateral requirements, thus prom...

We analyze how pandemic business interruption coverage can be put in place by building on capitalization mechanisms. The pandemic risk cannot be mutualized since it affects simultaneously a large number of businesses, and furthermore, it has a systemic nature because it goes along with a severe decline in the real economy. However, as shown by COVI...

We analyze how insurance law can mitigate moral hazard by allowing insurers to reduce or cancel coverage in some circumstances. We consider an incomplete contract setting in which the insurer may obtain information related to the policyholder's behavior through a costly audit of the circumstances of the loss. Court decisions are based on a standard...

Catastrophic risks are often characterised by a low probability, a high severity and a large number of affected individuals. Taking these specificities into account, we analyse the capacity of insurance contracts to provide coverage for those risks, independently from the market failures frequently observed in practice. On the demand side, we chara...

We characterize the design of insurance schemes when policyholders face several insurable risks in a context of adverse selection. Splitting risks emerges as a feature of second‐best Pareto optimality. This may take the form of risk‐specific contracts, or of contracts where risks are bundled but subject to differential coverage rules, such as risk‐...

We analyze the design of optimal medical insurance under ex post moral hazard, i.e., when illness severity cannot be observed by insurers and policyholders decide for themselves on their health expenditures. The trade-off between ex ante risk sharing and ex post incentive compatibility is analyzed in an optimal revelation mechanism under hidden inf...

Audit mechanisms frequently take place in the context of repeated relationships between auditor and auditee. This paper focuses attention on the insurance fraud problem in a setting where insurers repeatedly verify claims satisfied by service providers (e.g., affiliated car repairers or members of managed care networks). We highlight a learning bia...

In the linear coinsurance problem, examined first by Mossin (1968), a higher absolute risk aversion with respect to wealth in the sense of Arrow–Pratt implies a higher optimal coinsurance rate. We show that this property does not hold for health insurance under ex post moral hazard; i.e., when illness severity cannot be observed by insurers, and po...

We show that an equilibrium always exists in the Rothschild-Stiglitz insurance market model with adverse selection and an arbitrary number of risk types, when insurance contracts include policy dividend rules. The Miyazaki-WilsonSpence state-contingent allocation is an equilibrium allocation, and it is the only one when out-of-equilibrium beliefs s...

We analyze, from theoretical and empirical standpoints, how insurance distribution channels may a§ect fraud when policyholders and service providers collude. The empirical analysis focuses on the Taiwan automobile insurance market. Striking forms of claims manipulation exist in this market: opportunistic policyholders tend to manipulate claim dates...

We analyze the optimal insurance coverage for high severity-low probability accidents, both from theoretical and applied standpoints. Such accidents qualify as catastrophic when their risk premium is a non-negligible proportion of the victims’ wealth, although the probability of occurrence is very small. We show that this may be the case when the i...

La production d'’électricité au moyen de l'’énergie nucléaire est une activité dont on ne peut ignorer les risques et elle doit faire l’objet d'’un calcul économique approprié. Les spécificités du risque nucléaire justifient que le décideur public incorpore une valorisation adéquate de ces risques dans la balance des coûts et des bénéfices : il s’a...

Insurers have the reputation of being bad payers who nitpick whenever an opportunity arises. However, this nitpicking activity has a positive impact on their auditing strategy since auditing may prove profitable when claims are not fraudulent. We show that reducing the indemnity payments of audited claims induces a lower fraud rate at equilibrium a...

We show that an equilibrium always exists in the Rothschild-Stiglitz insurance market model with adverse selection when insurers can offer either non- participating or participating policies, i.e. insurance contracts which may involve policy dividends or supplementary calls for premium. The equilibrium coincides with the Miyazaki- Spence-Wilson equ...

We survey recent developments in the economic analysis of insurance fraud. This chapter first sets out the two main approaches to insurance fraud that have been developed in the literature, namely the costly state verification and the costly state falsification. Under costly state verification, the insurer can verify claims at some cost. Claims' ve...

A captive is an insurance or reinsurance company established by a parent group to finance its own risks. Captives mix internal risk pooling between the business units of the parent group and risk transfer toward the reinsurance market. We analyze captives from an optimal insurance contract perspective. The paper considers the vertical contractual c...

This paper analyzes the equilibrium of an insurance market where applicants for insurance have a duty of good faith when they reveal private information about their risk type. Insurers can, at some cost, verify the type of insureds who file a claim and they are allowed to retroactively void the insurance contract if it is established that the polic...

This article investigates the role of private insurance in the prevention and mitigation of natural disasters. We characterize the equity-efficiency trade-off faced by the policymakers under imperfect information about individual prevention costs. It is shown that a competitive insurance market with actuarial rate making and compensatory tax-subsid...

This paper provides a theoretical analysis of the benefits for an insurance company to develop its own network of service providers when insurance fraud is characterized by collusion between policyholders and providers. In a static framework without collusion, exclusive affiliation of providers allows insurance companies to recover some market powe...

*This special issue brings together proceedings of the workshop on Insurance and Adaptation to Climate Change, organized by the Ecole Polytechnique and the French Environmental and Energy Management Agency (ADEME) on March 13 2007, in Paris (France), under the sponsorship of the AXA-Risk Foundation Chair of Large Risks in Insurance, the EDF-Ecole P...

Many countries now issue driving licences where traffic violations are recorded through a point system, even though implementation varies among countries and even within a country. Depriving offenders of their licence is a non-monetary sanction that allows the government to incapacitate dangerous individuals and that also deters most drivers from i...

The impact of information distribution on optimal risk-sharing between different parties has been an important field of research over the past 30 years. In the literature of insurance, however, the focus has remained essentially on one configuration: insurers (the principal) propose a contract to insured (the agent), but are unable to observe perfe...

It is sometimes argued that road safety measures or automobile safety standards fail to save lives because safer highways or safer cars induce more dangerous driving. A similar but less extreme view is that ignoring the behavioral adaptation of drivers would bias the cost-benefit analysis of a traffic safety measure. This article derives cost-benef...

Cet article analyse l'équilibre d'un marché d'assurances où les individus qui souscrivent une police d'assurance ont une obligation de bonne foi lorsqu'ils révèlent une information privée sur leur risque. Les assureurs peuvent, à un certain coût, vérifier le type des assurés qui présentent une demande d'indemnité et ils sont autorisés à annuler rét...

Cet article établit une liaison entre la théorie de l'audit optimal et la méthodologie du scoring dans un contexte d'asymétrie d'information. L'application retenue concerne la fraude à l'assurance, mais la même approche peut être appliquée à d'autres activités qui utilisent le scoring. Nous montrons que la stratégie et l'audit optimal consistent à...

La distinction habituelle entre risques d’assurance et risques financiers s’atténue aujourd’hui devant les transformations des risques auxquels sont confrontés individus et entreprises. Les techniques de transfert des risques repoussent les limites de l’assurabilité, tandis que se développent des formes d’auto-assurance des entreprises qui tendent...

This article aims at making a bridge between the theory of optimal auditing and current procedures applied to audit files in different markets where scoring is the instrument used to implement an audit strategy. The literature has not yet developed an optimal audit policy for the scoring methodology. Our application is meant for the audit of insura...

This paper investigates the trade-off between solidarity and incentives to prevention in the insurance of natural disasters. Our strating point is the French indemnification system for natural disasters governed by the Law of 13 July 1982: in order to assert the solidarity of the nation with high risk individuals, all property insureds have to pay...

The law of insurance contracts provides that if the policyholder is shown to have knowingly misrepresented material facts about his risks in his application, the insurer can cancel the contract ex post facto and refuse to pay any claims. This good faith principle is widespread, but implemented with unequal strictness, under common law or statute la...

This paper analyses the role of the managers' non-pecuniary private benefits in an incomplete contract approach to the regulation of utilities. Private benefits may take various forms: excessive job security, perks, overstaffing, feeling of power. The model describes the relationship between a government and the manager of a firm which produces a p...

1 We specially thank C. Gollier and B. Jullien for their advice. We are also grateful towards N. for helpful comments. Finally we bene…ted from participants at the 26th Seminar of the "European Group of Risk and Insurance Economists" (Madrid, 1999), the CORE Summer School "Information in Games, Markets and Organizations" (Uni-versité Catholique de...

We survey recent developments in the economic analysis of insurance fraud. The paper first sets out the two main approaches to insurance fraud that have been developed in the literature, namely the costly state verification and the costly state falsification. Under costly state verification, the insurer can verify claims at some cost. Claims’ verif...

This article characterizes the optimal corporate fire insurance contract when the insured firm has private information about the economic value of the damaged assets. It is shown that the indemnity should be lower when the firm receives insurance money than in case of reinstatement, but there should be partial coverage even when reinstatement is ch...

It is sometimes argued that road safety measures or automobile safety standards fail to save lives because safer highways or safer cars induce more dangerous driving. A similar but less extreme view is that ignoring the behavioral adaptation of drivers would bias the cost-benefit analysis of a traffic safety measure. This article derives cost-benef...

This article characterizes the optimal corporate fire insurance contract when the insured firm has private information about the economic value of the damaged assets. It is shown that the indemnity should be lower when the firm receives insurance money than in case of reinstatement, but there should be partial coverage even when reinstatement is ch...

We provide a characterization of an optimal insurance contract (coverage schedule and audit policy) when the monitoring procedure is random. When the policyholder exhibits constant absolute risk aversion, the optimal contract involves a positive indemnity payment with a deductible when the magnitude of damages exceeds a threshold. In such a case, m...

The impact of a stronger work requirement for welfare recipients in a workfare program is studied in an efficiency wage model where a representative firm chooses its level of monitoring activities. A stricter workfare policy raises employment as well as the monitoring intensity. It typically increases profits and reduces the tax rate. The impact on...

This paper analyses the role of non-pecuniary private benefits going to employees in an incomplete contract approach to the regulation of utilities.

Ce chapitre aborde l'analyse théorique des politiques de réduction de l'offre agricole via l'incitation ou l'obligation au gel de terres. Le modèle proposé repose sur la théorie des contrats dans un cadre d'autosélection. Il permet d'évaluer l'impact de l'asymétrie d'information, portant sur les rendements des exploitations agricoles, sur les polit...

We study decentralization in public decision-making as the possibility for local authorities to sign incentive contracts with local agents in a context of asymmetric information. We first review some theoretical arguments put forward for the optimality of decentralized structures. We then present a model of organization of incentive policy in the E...

This paper characterizes the equilibrium of an insurance market where opportunist policyholders may file fraudulent claims. We assume that insurance policies are traded in a competitive market where insurers cannot distinguish honest policyholders from opportunists. The insurer-policyholder relationship is modelled as an incomplete information game...

We study decentralization in public decision-making as the possibility for local authorities to sign incentive contracts with local agents in a context of asymmetric information. We first review some theoretical arguments put forward for the optimality of decentralized structures. We then present a model of organization of incentive policy in the E...

A model of optimal territorial decentralization is presented in which smaller local governments have an informational advantage concerning public goods' production costs and the central government has imperfect information on spillover effects induced by local projects. The attention is focused on the optimal size of local entities and on the shape...

We build a hierarchical model of contractual relationships under moral hazard to address issues about subsidiarity, i.e. optimal (de)centralization of incentive industrial policies at the national level or at the European Community level. Incentive policy is viewed as an incentive contract for producers who take unobservable decisions that have spi...

Depuis le milieu des années soixante-dix, l'analyse économique néo-classique s'est progressivement centrée sur le contrat comme forme prototype de régulation des échanges. Cet article présente les notions clés de la théorie économique des contrats en distinguant les types d'acteurs (le principal, l'agent) et les risques (sélection adverse, risque m...

This paper is devoted to a theoretical analysis of policies aiming at reducing the supply of agricultural produce through contractual or mandatory land set-aside. The model relies on contract theory under adverse selection: it allows us to evaluate the impact of asymmetric information about yields on the optimal price support policy and on land set...

The authors consider a model where two agents, privately informed about their own characteristics, play a game on behalf of two uninformed principals. They analyze the existence of recommitment effects through public announcement of contracts in a model where agency contracts, designed ex-ante, can always be secretly renegotiated. The authors show...

RÉSUMÉ Cet article examine les conséquences de l’hypothèse de rationalité approchée de Akerlof et Yellen, dans le cadre de la théorie des équilibres à prix fixes avec rationnements. Nous envisageons une économie soumise à des chocs monétaires transitoires où les prix restent fixés au niveau walrasien anticipé. Les agents forment des conjectures qui...

This paper analyses, in a simple two-region model, the undertaking of noxious facilities when the central government has limited prerogatives. The central government decides whether to construct a noxious facility in one of the regions, and how to …nance it. We study this problem under both full and asymmetric information on the damage caused by th...

This paper surveys some recent developments of the literature on adverse selection and moral hazard in agency problems. It is concerned with the case where both aspects coexist and both agents are income risk-neutral. It shows that in most cases, the moral hazard aspect does not entail welfare losses compared to the pure adverse selection case. It...

This paper presents an overview of optimal pricing rules for telecommunication public utilities. The optimal two part tariff is characterized in a model which accounts for two types of externalities (network externality and benefit of an incoming call to the recipient). The optimal nonlinear pricing rule is also analysed and it is shown that this n...

Résumé Cet article propose une analyse des contrats de coopération en matière de recherche-développement, mettant l’accent sur les questions d’information et d’incitation. Les auteurs montrent comment les techniques nouvelles utilisées en théorie économique de l’information peuvent conduire à des conclusions, tout au moins qualitatives, sur la form...

This paper characterizes a class of optimal incentive schemes in a simple principal–agent model which allows for moral hazard and adverse selection. We show that incentive compatible allocation can always be (approximately) implemented through a menu of quadratic incentive schemes. It is also proved that the set of incentive compatible allocations...

The paper focuses on the interaction between the goals of optimal stabilization and of allocative efficiency in project evaluation, in an economy that is small as an exporter, which must maintain trade balance, and where some disequilibrium may prevail on goods and labour markets. The criteria that are developed reflect an aggregation of profitabil...

L'article analyse les modifications aux règles habituelles du calcul économique en présence de déséquilibre dû à l'existence d'une contrainte extérieure. Les propriétés du modèle font apparaître des prix fictifs définissant les valeurs sociales des biens et du travail. On examine également les circonstances dans lesquelles une modification du taux...

The purpose of this paper is to study the dynamics of temporary equilibria in a disequilibrium growth model. Dynamics rests upon adjustment mechanisms of prices, capital stock, money balances, and labour supply. Wage dynamics is supposed to be influenced by indexation processes, and this question is related to the investment behaviour of firms. We...

Cet article étudie le comportement optimal des entreprises publiques et les règles de taxation indirecte qui devraient être appliquées dans une économie ouverte, soumise à une contrainte d'équilibre de la balance commerciale. Il met l'accent sur la relation existant entre les prix fictifs, qui permettent de décentraliser la production du secteur pu...

[fre] L'article analyse les modifications aux règles habituelles du calcul économique en présence de déséquilibre dû à l'existence d'une contrainte extérieure. Les propriétés du modèle font apparaître des prix fictifs définissant les valeurs sociales des biens et du travail.. On examine également les circonstances dans lesquelles une modification d...

Growth anp inflation in a disequilibrium model Pierre Picard The purpose of this paper is to study the dynamics of temporary equilibria — or fixed-price equilibria — in the framework of a macroeconomic growth model. The general framework of the study is a model of the Barro-Grossman type. The dynamics rests upon adjustment processes of real wages,...

Two planning procedures are proposed in which the information flowing from the Central Planning Board to the firms takes the form of prices and quantitative indices (production target or input allocation).

This book is concerned with the problem of wage rigidities in macroeconomic theory, and their implications for public policy. It offers an analysis of the microeconomic foundations of rigid wages, considering their implications for normative economics, and their role in explaining involuntary unemployment. The initial chapters examine short-run mac...

Abstract This paper analyses the role of non pecuniary private benets,of managers in an incomplete contract approach to the regulation of utilities. Private ben- ets may take various forms: excessive job security, perks, empire building feelings, overstangmodel describes the relationship between a government and the manager of a rm which produces a...