Optimal Insurance Policy Indemnity Schedules

Abstract

We focus on two commonly observed insurance policy provisions: upper limits on coverage and deductibles. We suggest that upper limits on coverage result from the effective limited liability obtained through the bankruptcy statutes. We show that absent moral hazard, if the administrative cost structure has fixed costs and scale economies, deductibles are not optimal. But the optimal contractual form leads to a moral hazard problem, which deductibles control.