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Pareto efficient insurance contracts when the insurer's cost function is discontinuous

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  • Guillaume Carlier
  • Rose-Anne Dana

Abstract

We consider the problem of efficient insurance contracts when the cost structure includes a fixed cost per claim. We prove existence of efficient insurance contracts and that the indemnity function in such contracts is non-decreasing in the damage. We further show that either there is no insurance, or the indemnity is positive for all losses, or efficient insurance contracts have a unique jump. We study variants of the model and provide a generalization to the case of non expected utilities. Our results are then applied to Townsend's model of deterministic auditing. Copyright Springer-Verlag Berlin Heidelberg 2003

Suggested Citation

  • Guillaume Carlier & Rose-Anne Dana, 2003. "Pareto efficient insurance contracts when the insurer's cost function is discontinuous," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(4), pages 871-893, June.
    • Handle: RePEc:spr:joecth:v:21:y:2003:i:4:p:871-893
    DOI: 10.1007/s00199-002-0281-z
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    References listed on IDEAS

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    Keywords

    Keywords and Phrases: Efficient insurance contracts; Discontinuous cost function; Auditing.; JEL Classification Numbers: C61; G22.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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