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La Crema: A Case Study of Mutual Fire Insurance

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  • Cabreales, Antonio
  • Calvo-Armengol, Antoni
  • Jackson, Matthew O.

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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Bibliographic Info

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, Wiley Blackwell, vol. 61(4), pages 701-19, October.
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Cited by:
  1. Daniel J. Clarke, 2011. "Reinsuring the Poor: Group Microinsurance Design and Costly State Verification," Economics Series Working Papers 573, University of Oxford, Department of Economics.
  2. Makoto Shimoji & Paul Schweinzer, 2012. "Implementation without Incentive Compatibility: Two Stories with Partially Informed Planners," Discussion Papers 12/21, Department of Economics, University of York.
  3. 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.
  4. Roberto Serrano, 2003. "The Theory of Implementation of Social Choice Rules," Economics Working Papers 0033, Institute for Advanced Study, School of Social Science.
  5. Assefa, Tsion Taye & Meuwissen, Miranda P.M. & Van Asseldonk, Marcel A.P.M., . "Mutual insurance companies as a tool for farmer income stabilization: performance and prospects in the CAP," 126th Seminar, June 27-29, 2012, Capri, Italy 125991, European Association of Agricultural Economists.

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