Moral hazard is one of the oldest ideas in insurance economics, and plays a central role in the
business of insurance. As has long been understood, it occurs because the transfer of risk from
the policyholder to the insurer leaves the former with a diminished incentive to prevent or avoid
bad outcomes. This insight profoundly shapes the design of insurance contracts; it has also
played a role in thousands of judicial and regulatory decisions in insurance law and has given
rise to a vast academic literature. But insurance does not just affect the behavior of the insured
policyholder: in many settings, it can influence others who are not parties to the insurance
contract. UConn Law Professor Peter Siegelman and Penn Law Professor Gideon Parchomovsky found that this problem requires careful scrutiny and innovative solutions.

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