Price Equilibrium, Efficiency, and Decentralizability in Insurance Markets with Moral Hazard
AbstractIn this paper we investigate the descriptive and normative properties of competitive equilibrium with moral hazard when forms offer "price contracts" which allow clients to purchase as much insurance as they wish to at the quoted price. We show that a price equilibrium always exists and is one of three types i.) Zero-profit price equilibrium- zero profit, zero effort, and full insurance ii.) Positive- profit price equilibrium- positive profit, positive effort, partial insurance iii) zero- insurance price equilibrium- zero insurance, zero profit, positive effort. Suppose a client purchases an additional unit of insurance from an insurer and consequently reduces accident- avoidance effort. This will lower the profitability of insurance the client has obtained form other insurers. In setting price, the insurer neglects this effect, however. Thus, price insurance entails an externality. We show under what circumstances this externality can be fully internalized by a linear tax on insurance sales. Actual insurance contracts lie in the middle ground between exclusive quantity contracts (where an individual is effectively constrained to purchase all his insurance from one firm) and price contracts. We argue that our analysis of price contracts sheds light on the welfare properties of actual insurance contracts. Notably, since the externality we identify will still be operative, the taxation of insurance sales is typically desirable.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Laval - Laboratoire Econometrie in its series Papers with number 05.
Length: 38 pages
Date of creation: 1994
Date of revision:
Contact details of provider:
Postal: Chaire d'economie et d'econometrie de l'assurance; DELTA; CREST; PARIS, France.
econometrics ; insurance;
Other versions of this item:
- Richard Arnott & Joseph Stiglitz, 1993. "Price Equilibrium, Efficiency, And Decentralizability In Insurance Markets With Moral Hazard," Boston College Working Papers in Economics 254, Boston College Department of Economics.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Tano Santos & José A. Scheinkman, 2000.
"Competition Among Exchanges,"
CRSP working papers
514, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Alberto Bennardo & P.A. Chiappori, 2002.
"Bertrand and Walras equilibria under moral hazard,"
CSEF Working Papers
87, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Bennardo, Alberto & Chiappori, Pierre-André, 2002. "Bertrand and Walras Equilibria Under Moral Hazard," CEPR Discussion Papers 3650, C.E.P.R. Discussion Papers.
- Alberto Bennardo & Pierre-Andre Chiappori, 2003. "Bertrand and Walras Equilibria Under Moral Hazard," Levine's Working Paper Archive 618897000000000748, David K. Levine.
- Richard Arnott & Chong-en Bai & Brian Sack, 1996. "Latent Policies: An Extended Example," Boston College Working Papers in Economics 353., Boston College Department of Economics.
- Tano Santos & Jose A. Scheinkman, 2001. "Financial Intermediation without Exclusivity," American Economic Review, American Economic Association, vol. 91(2), pages 436-439, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.