Moral Hazard in Insurance: Theory and Evidence from a Credit Reform in Ghana

Consumers in developing countries often buy insurance on credit. By allowing them to buy more coverage, it may lead to more claims. I evaluate this moral hazard effect by exploiting a regulatory reform in Ghana that outlawed the purchase of auto-insurance on credit. Consumers responded by switching from comprehensive to basic insurance. I show that if this change in contracts leads to a change in the distribution of claims, this implies the existence of moral hazard. Using administrative data on insurance contracts, I provide evidence and bounds on the effects of moral hazard. Results are likely driven by credit constraints.