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Optimal Insurance for Small Stakeholders

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  • Frankel, David M.
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    Abstract

    We study optimal insurance for consumers who must decide whether or not to buy from a unionized firm that produces a good that is subject to network externalities. The union first announces a wage schedule. The firm then sees a precise public signal of a random economic state and chooses a price. The consumers then see even more precise signals of the state and decide whether or not to buy. The network externality and the union pricing distortion lead them to buy too infrequently. We show that the first best can be costlessly attained by providing countercyclical purchase insurance.

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    File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p17551-2014-04-26.pdf
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    Bibliographic Info

    Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 37551.

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    Date of creation: 26 Apr 2014
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    Handle: RePEc:isu:genres:37551

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    Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
    Phone: +1 515.294.6741
    Fax: +1 515.294.0221
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    Web page: http://www.econ.iastate.edu
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    Keywords: Stakeholders; Optimal Insurance; Labor Unions; Automobiles; Detroit; Crises; network externalities;

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