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Bargaining power and efficiency in insurance contracts

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  • Quiggin, John
  • Chambers, Robert G.

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

  • Quiggin, John & Chambers, Robert G., 2005. "Bargaining power and efficiency in insurance contracts," Risk and Sustainable Management Group Working Papers 151182, University of Queensland, School of Economics.
    • Handle: RePEc:ags:uqsers:151182
    DOI: 10.22004/ag.econ.151182
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    References listed on IDEAS

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    1. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    2. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
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    4. Viaene, Stijn & Veugelers, Reinhilde & Dedene, Guido, 2002. "Insurance bargaining under risk aversion," Economic Modelling, Elsevier, vol. 19(2), pages 245-259, March.
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    6. Quiggin, John, 2002. "Risk and Self-Protection: A State-Contingent View," Journal of Risk and Uncertainty, Springer, vol. 25(2), pages 133-145, September.
    7. Chambers,Robert G. & Quiggin,John, 2000. "Uncertainty, Production, Choice, and Agency," Cambridge Books, Cambridge University Press, number 9780521622448.
    8. Clive Bell, 1989. "The Choice of Tenancy Contract," International Economic Association Series, in: Irma Adelman & Sylvia Lane (ed.), The Balance between Industry and Agriculture in Economic Development, chapter 9, pages 161-178, Palgrave Macmillan.
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    Citations

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    Cited by:

    1. Boonen, Tim J., 2016. "Nash equilibria of Over-The-Counter bargaining for insurance risk redistributions: The role of a regulator," European Journal of Operational Research, Elsevier, vol. 250(3), pages 955-965.
    2. Boonen, Tim J. & De Waegenaere, Anja & Norde, Henk, 2017. "Redistribution of longevity risk: The effect of heterogeneous mortality beliefs," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 175-188.
    3. Huang, Rachel J. & Huang, Yi-Chieh & Tzeng, Larry Y., 2013. "Insurance bargaining under ambiguity," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 812-820.
    4. Hu, Duni & Chen, Shou & Wang, Hailong, 2018. "Robust reinsurance contracts with uncertainty about jump risk," European Journal of Operational Research, Elsevier, vol. 266(3), pages 1175-1188.
    5. Yanbin Chen & Pu Chen & Yumei Guo & Sanxi Li & Dongmin Yao, 2019. "Bargaining to Design Contracts under Moral Hazard," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 175(4), pages 714-735.
    6. J François Outreville, 2010. "The Geneva Risk and Insurance Review 2009: In Quest of Behavioural Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 35(3), pages 484-497, July.

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    More about this item

    Keywords

    Institutional and Behavioral Economics; Research Methods/ Statistical Methods;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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