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La Crema: A Case Study of Mutual Fire Insurance

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Author Info
Antonio Cabrales
Antoni Calvó
Matthew O. Jackson

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Abstract

We analyze a mutual fire insurance mechanism used in Andorra, which is called La Crema in the local language. This mechanism relies on households' announced property values to determine how much a household is reimbursed in the case of a fire and how payments are apportioned among other households. The only Pareto eficient allocation reachable through the mechanism requires that all households honestly report the true value of their property. However, such honest reporting is not an equilibrium except in the extreme case where the property values are identical for all households. Nevertheless, as the size of the society becomes large, the benefits from deviating from truthful reporting vanish, and all of the non-degenerate equilibria of the mechanism are nearly truthful and approximately Pareto efficient.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/518.pdf
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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 518.

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Date of creation: Dec 2000
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Handle: RePEc:upf:upfgen:518

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Web page: http://www.econ.upf.edu/

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Related research
Keywords: Insurance; contract theory; mechanism design; truthful revelation;

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Find related papers by JEL classification:
A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D64 - Microeconomics - - Welfare Economics - - - Altruism
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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  1. Besley, Timothy & Coate, Stephen & Loury, Glenn, 1994. "Rotating Savings and Credit Associations, Credit Markets and Efficiency," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 701-19, October. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lanny Arvan & David Nickerson, 2006. "Private Investment, Public Aid and Endogenous Divergence in the Evolution of Urban Neighborhoods," The Journal of Real Estate Finance and Economics, Springer, vol. 32(1), pages 83-100, February. [Downloadable!] (restricted)
  2. Roberto Serrano, 2003. "The Theory of Implementation of Social Choice Rules," Working Papers 2003-19, Brown University, Department of Economics. [Downloadable!]
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  3. Marco Ottaviani & Peter Norman Sørensen, 2006. "Noise, Information, and the Favorite-Longshot Bias," FRU Working Papers 2006/04, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
    Other versions:
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