Moral hazard and nonmarket institutions: Dysfunctional crowding out or peer monitoring?

Richard Arnott; Joseph E. Stiglitz

doi:10.1016/1057-0810(91)90034-V

Moral hazard and nonmarket institutions

Dysfunctional crowding out or peer monitoring?

Authors

Richard Arnott Boston College
Joseph E. Stiglitz Stanford University

DOI:

https://doi.org/10.1016/1057-0810(91)90034-V

Abstract

We examine a situation in which insurance is characterized by moral hazard. When market insurance is provided, supplementary mutual assistance between family and friends (unobservable to market insurers) will occur. When nonmarket issuers have no better information than market insurers, the mutual assistance not only crowds out market insurance but is also harmful and therefore dysfunctional. Alternatively, when nonmarket insurers can observe each other's effort perfectly, mutual assistance is beneficial. These results point to the potential importance of peer-monitoring mechanisms in mitigating moral hazard. (JEL 026) (reprinted with permission)

Published

1991-12-30

How to Cite

Arnott, R., & Stiglitz, J. E. (1991). Moral hazard and nonmarket institutions: Dysfunctional crowding out or peer monitoring?. Financial Services Review, 1(2), 178. https://doi.org/10.1016/1057-0810(91)90034-V

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Issue

Vol. 1 No. 2 (1991): Financial Services Review

Section

Abstracts of Articles on Individual Financial Management

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