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La Crema: A Case Study of Mutual Fire Insurance

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Author Info
Cabreales, Antonio
Calvo-Armengol, Antoni
Jackson, Matthew O.

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Abstract

We analyze a mutual fire insurance mechanism used in Andorra, which is called La Crema in the local language. This mechanism relies on households' announced property values to determine how much a household is reimbursed in the case of a fire and how payments are apportioned among other households. The only Pareto-efficient allocation reachable through the mechanism requires that all households honestly report the true value of their property. However, such honest reporting is not an equilibrium except in the extreme case in which the property values are identical for all households. Nevertheless, as the size of the society becomes large, the benefits from deviating from truthful reporting vanish, and all the nondegenerate equilibria of the mechanism are nearly truthful and approximately Pareto efficient.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 111 (2003)
Issue (Month): 2 (April)
Pages: 425-458
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Handle: RePEc:ucp:jpolec:v:111:y:2003:i:2:p:425-458

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  1. Besley, Timothy & Coate, Stephen & Loury, Glenn, 1994. "Rotating Savings and Credit Associations, Credit Markets and Efficiency," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 701-19, October. [Downloadable!] (restricted)
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  1. Lanny Arvan & David Nickerson, 2006. "Private Investment, Public Aid and Endogenous Divergence in the Evolution of Urban Neighborhoods," The Journal of Real Estate Finance and Economics, Springer, vol. 32(1), pages 83-100, February. [Downloadable!] (restricted)
  2. Roberto Serrano, 2003. "The Theory of Implementation of Social Choice Rules," Working Papers 2003-19, Brown University, Department of Economics. [Downloadable!]
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  3. Marco Ottaviani & Peter Norman Sørensen, 2006. "Noise, Information, and the Favorite-Longshot Bias," FRU Working Papers 2006/04, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
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