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Second-best insurance contract design in an incomplete market

Author

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  • GOLLIER, Christian

    (HEC School of Management, Paris)

  • SCHLESINGER, Harris

    (University of Alabama)

Abstract

This paper considers the optimal form of insurance contracts for multiple risks. A well-known result in the literature is that, under fairly general conditions, an insurance policy with a deductible for aggregate losses is optimal. We provide a new proof of this result based only on stochastic dominance (whereas existing proofs require dynamic optimization techniques). Considering a real-world incompleteness, whereby separate loss exposures are indemnified via separate contracts, we show that separate deductibles are second-best optima in this setting. We compare the indemnity provided in this second-best setting with first-best solutions. The effect of second-best contracts on the individual's total insurance demand is also examined.

Suggested Citation

  • GOLLIER, Christian & SCHLESINGER, Harris, 1992. "Second-best insurance contract design in an incomplete market," LIDAM Discussion Papers CORE 1992012, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:1992012
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp1992.html
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