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Impact of Information Asymmetry and Limited Production Capacity on Business Interruption Insurance

We consider a firm that faces a potential disruption in its normal operations can purchase business interruption (BI) insurance from an insurer to guard against the disruption risk. The firm makes demand forecasts and can put a recovery effort if a disruption occurs; both are unobservable to the insurer. Accordingly, the insurer offers BI insurance to the firm while facing adverse selection and moral hazard. We first find that, because of the joint effect of limited production capacity and self-impelled recovery effort, the firm with a lower demand forecast benefits more from BI insurance than that with a higher demand forecast. Anticipating a higher premium, the low-demand firm has an incentive to pretend to have the higher demand forecast to obtain more profit. We then derive the optimal insurance contracts to deal with the information asymmetry and show how the firm’s characteristics affect the optimal contracts. Both high- and low-demand contracts are affected by the firm’s operational characteristics in the same direction, and the informational characteristics impact those contracts differently. We also analyze the case in which the firm can choose its initial capacity and find that, from the firm’s perspective, capacity and BI insurance could be either substitutes or complements.

Ketersediaan

Informasi Detail

Judul Seri

MANAGEMENT SCIENCE; Vol.68 No.4 April 2022

No. Panggil

-

Penerbit

: .,

Deskripsi Fisik

p. 2824-2841

Bahasa

English

ISBN/ISSN

-

Klasifikasi

NONE

Tipe Isi

-

Tipe Media

-

Tipe Pembawa

-

Edisi

-

Subjek

ADVERSE SELECTION
MORAL HAZARD
DISRUPTION MANAGEMENT
BUSINESS INTERRUPTION INSURANCE

Info Detail Spesifik

https://doi.org/10.1287/mnsc.2020.3776

Pernyataan Tanggungjawab

Yuan-Mao Kao, N. Bora Keskin, Kevin Shang

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