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Mickey Mouse and Moral Hazard: Uninformative but Correlated Triggers. Working Paper

By Neil Doherty and Olivier Mahul


Holmström has argued that multiple signals can be used to redress moral hazard only if the additional signals are informative of the agent’s hidden action. Additional signals are now being used in insurance securitizations that have the opposite function; they are uninformative of the policyholder’s action, but they are correlated with the loss. We rework the principal agent model to examine these triggers. We will also illustrate how the Oriental Land Company, owners of Tokyo Disneyland, as well as many insurance companies, are using these triggers and how they are now being embodied in executive compensation contracts

Topics: basis risk, index based contracts, moral hazard, securitization
Year: 2001
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