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Market Power and Asset Contractibility in Dynamic Insurance Contracts

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  • Alexander K. Karaivanov
  • Fernando M. Martin

Abstract

The authors study the roles of asset contractibility, market power, and rate of return differentials in dynamic insurance when the contracting parties have limited commitment. They define, characterize, and compute Markov-perfect risk-sharing contracts with bargaining. These contracts significantly improve consumption smoothing and welfare relative to self-insurance through savings. Incorporating savings decisions into the contract (asset contractibility) implies sizable gains for both the insurers and the insured. The size and distribution of these gains depend critically on the insurers? market power. Finally, a rate of return advantage for insurers destroys surplus and is thus harmful to both contracting parties.

Suggested Citation

  • Alexander K. Karaivanov & Fernando M. Martin, 2016. "Market Power and Asset Contractibility in Dynamic Insurance Contracts," Review, Federal Reserve Bank of St. Louis, vol. 98(2).
    • Handle: RePEc:fip:fedlrv:00057
    DOI: 10.20955/r.2016.111-127
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    References listed on IDEAS

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    Cited by:

    1. Karaivanov, Alexander K. & Martin, Fernando M., 2018. "Markov-perfect risk sharing, moral hazard and limited commitment," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 1-23.

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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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