A Game-Theoretic Analysis of the Sanctions for Breach of Duty to Disclose in Insurance Contracts: A Comparison of the “All or Nothing” and “Pro Rata” Methods

Abstract Using a game-theoretic analysis, this study aims to investigate which of the “all or nothing” and “pro rata” methods, regarding the sanction against the breach of duty to disclose in insurance contracts by negligence, is better from two perspectives: one is in terms of how much the sanction increases the policyholder’s probability of effort, while the other is how much it increases the probability of finding the wrong type of policyholder by insurance firms. From the analysis, we find that the desirable method depends on the probability that the policyholders can effortlessly determine their precise risk type as well as their effort cost level.