Moral Hazard in a Mutual Health Insurance System: German Knappschaften, 1867-1914

The Knappschaft was a mutual association through which German miners insured themselves against accident, illness, and old age. The Knappschaft underlies Bismarck's sickness and accident insurance legislation, and thus Germany's system today. This article focuses on moral hazard, which plagued the Knappschaften in the later nineteenth century. Sick pay made it attractive for miners to feign illness that made them unable to work. We outline the moral hazard problem the Knappschaften faced as well as the mechanisms they devised to control it, and then use econometric models to demonstrate that those mechanisms were at best imperfect.