Alleviating Moral Hazard by Peer-to-Peer Insurance

This article studies the recently emerging peer-to-peer insurance contract and find that it can alleviate the moral hazard problem deeply rooted in the insurance industry. We set up a model with two agents in the group. Each person's loss probability is affected by her own efforts and help from others. We find that as long as the additional costs of not specializing is adequately small, individuals efforts to themselves and cooperation will exist. We also find that if the cashback proportion is increased, individuals will be more likely to make efforts to themselves and help others in the group. What's more, we demonstrate that when the additional cost of not specializing is small, cooperation has a positive effect on effort making. However, when the cost is large, the effect will be negative. Members joining in the same group of peer-to-peer insurance generally know each other and has low additional costs in not specializing. So peer-to-peer insurance contract can not only result in cooperation among members in the group but also can induce a higher level of effort to individuals themselves.