Mitigating moral hazard in insurance contracts using risk preference design

Shutian Liu; Quanyan Zhu

doi:10.1016/j.orl.2025.107322

Mitigating moral hazard in insurance contracts using risk preference design

Shutian Liu^*
, Quanyan Zhu

^*Corresponding author for this work

Department of Systems Engineering

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

2 Citations (Scopus)

29 Downloads (CityUHK Scholars)

Abstract

Preferences might be affected by exogenous inputs, such as information generated by advanced technologies. This paper proposes a thought experiment called risk preference design to investigate this influence within a class of principal-agent problems. Risk preference design has potential to mitigate moral hazard in insurance contracting. A quantitative approach is introduced to study the effects. We use a linear contract case study to demonstrate the role of risk preference design in strengthening financial security. © 2025 The Authors.

Original language	English
Article number	107322
Journal	Operations Research Letters
Volume	62
Online published	6 Jun 2025
DOIs	https://doi.org/10.1016/j.orl.2025.107322
Publication status	Published - Sept 2025

Funding

This work is partially supported by grants ECCS-1847056 and BCS-2122060 from National Science Foundation (NSF).

Research Keywords

Insurance contract
Moral hazard
Principal-agent problem
Risk preference design

Publisher's Copyright Statement

This full text is made available under CC-BY 4.0. https://creativecommons.org/licenses/by/4.0/

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10.1016/j.orl.2025.107322

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AU - Zhu, Quanyan

PY - 2025/9

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N2 - Preferences might be affected by exogenous inputs, such as information generated by advanced technologies. This paper proposes a thought experiment called risk preference design to investigate this influence within a class of principal-agent problems. Risk preference design has potential to mitigate moral hazard in insurance contracting. A quantitative approach is introduced to study the effects. We use a linear contract case study to demonstrate the role of risk preference design in strengthening financial security. © 2025 The Authors.

AB - Preferences might be affected by exogenous inputs, such as information generated by advanced technologies. This paper proposes a thought experiment called risk preference design to investigate this influence within a class of principal-agent problems. Risk preference design has potential to mitigate moral hazard in insurance contracting. A quantitative approach is introduced to study the effects. We use a linear contract case study to demonstrate the role of risk preference design in strengthening financial security. © 2025 The Authors.

KW - Insurance contract

KW - Moral hazard

KW - Principal-agent problem

KW - Risk preference design

UR - https://www.scopus.com/pages/publications/105007598609

UR - https://www.scopus.com/pages/publications/105007598609#tab=impact

U2 - 10.1016/j.orl.2025.107322

DO - 10.1016/j.orl.2025.107322

M3 - RGC 21 - Publication in refereed journal

SN - 0167-6377

VL - 62

JO - Operations Research Letters

JF - Operations Research Letters

M1 - 107322

ER -

Mitigating moral hazard in insurance contracts using risk preference design

Abstract

Funding

Research Keywords

Publisher's Copyright Statement

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