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Nonlinear Incentive Provision in Walrasian Markets: A Cournot Convergence Approach

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  • Martin Hellwig

    ()
    (Max Planck Institute for Research on Collective Goods, Bonn, Germany)

Abstract

The paper studies insurance with moral hazard in a system of contingent-claims markets. Insurance buyers are modelled as Cournot monopolists or oligopolists. The other agents condition their expectations on market prices, as in models of rational-expectations equilibrium with asymmetric information. Thereby they correctly anticipate accident probabilities corresponding to effort incentives induced by insurance buyers’ net trades. When there are many agents to share the insurance buyer’s risk, Cournot equilibrium outcomes are close to being second-best. In contrast, if insurance buyers are price takers, equilibria fail to exist or are bounded away from being second-best.

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Bibliographic Info

Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2004_8.

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Length: 48 pages
Date of creation: Aug 2004
Date of revision:
Publication status: published in Journal of Economic Theory 120 (2005), 1-38.
Handle: RePEc:mpg:wpaper:2004_08

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Keywords: Insurance; Moral Hazard; Incentive Contracting; Walrasian Markets; Rational-Expectations; Cournot Equilibrium;

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