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Bargaining power and efficiency in principal-agent relationships

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  • Chambers, Robert G.
  • Quiggin, John

Abstract

Insurance contracts are frequently modelled as principal--agent relationships. Although it is commonly assumed that the principal, in this case the insurer, has complete freedom to design the contract, the problem formulation in much of the principal--agent literature presumes that the contract is constrained-Pareto-efficient. In the present paper, we consider the implications of a richer specification of the choices available to clients. In particular, we consider the entire spectrum of possible power differentials in the contracting relationship between insurers and clients. Our central result is that the agent can exploit information asymmetries to offset the bargaining power of the insurer, but that this process is socially costly.

Suggested Citation

  • Chambers, Robert G. & Quiggin, John, 2003. "Bargaining power and efficiency in principal-agent relationships," Risk and Sustainable Management Group Working Papers 150342, University of Queensland, School of Economics.
    • Handle: RePEc:ags:uqsers:150342
    DOI: 10.22004/ag.econ.150342
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    Keywords

    Consumer/Household Economics; Demand and Price Analysis; Financial Economics;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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