Friday, May 14, 2004

Friday May 14, 2004

Filed under: General — m759 @ 6:36 PM

Moral Hazard —
The Devil and Wallace Stevens,
continued from May 1-2 entries:

Law Day,
Readings for Law Day,
Fallen from Heaven, and
The Script

University of Southern California, Department of Economics — Industrial Organization ECN 680 – Autumn 2002 — Introduction to Contract and Organization Theory —

Professor Jean-Jacques Laffont
(September 4October 21):

“The purpose of this course is to introduce the student to modern contract and organization theory. Part 1 of the course focuses upon models with moral hazard and adverse selection.”

From the insurance page at 


“The size of the insurance industry indicates that people are eager to pay to avoid risk. They pay and get nothing if fortune smiles on them, whereas if misfortune strikes, they break even because the insurance should just pay back the value lost in the misfortune.

Sometimes, however, people do better than break even when misfortune strikes, and this possibility has greatly interested economists. If, for example, the misfortune costs a person $1000, but insurance will pay $2000, the insured person has no incentive to avoid the misfortune and may act to bring it on. This tendency of insurance to change behavior is called moral hazard.

Sometimes moral hazard is dramatic….

People who know that they face large risks are more likely to buy insurance than people who face small risks. Insurance companies try to minimize the problem that only the people with big risks will buy their product, which is the problem of adverse selection ….”

From today’s New York Times:

“Jean-Jacques Laffont, an economist known for developing mathematical models to estimate what something is worth in situations of deep uncertainty, died on May 1 in Toulouse, France. He was 57….

…Jerry R. Green of Harvard said he was ‘an architect of systems’ and ‘a very original figure.’

Eric Maskin, a professor at the Institute for Advanced Study in Princeton, N.J., called Dr. Laffont ‘simply one of the major figures of our time.’

‘Many people would say he was the leading economist in Europe,’ he added, ‘and that wouldn’t be an unfair judgment.’

Although Dr. Laffont’s models were abstruse enough to satisfy the most theoretical economists, Dr. Green said they were adapted for practical purposes by companies, as well as by public television for scheduling programs.”

1 Comment

  1. “Moral hazard” and “adverse selection” are phrases I’d never heard, although the concepts they represent are quite familiar to me. Thank you for expanding my lexicon, again.

    Comment by SuSu — Friday, May 14, 2004 @ 6:41 PM

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