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Liability Insurance: Equilibrium Contracts under Monopoly and Competition

Author

Listed:
  • Jorge Lemus
  • Emil Temnyalov
  • John L. Turner

Abstract

In liability lawsuits (e.g., patent infringement), a plaintiff demands compensation from a defendant, and the parties often negotiate a settlement to avoid a costly trial. Liability insurance creates bargaining leverage for the defendant in this settlement negotiation. We study the characteristics of monopoly and equilibrium contracts in settings where this leverage effect is a substantial source of value for insurance. Our results show that under adverse selection, a monopolist offers at most two contracts, which underinsure low-risk types and may inefficiently induce high-risk types to litigate. In a competitive market, only a pooling equilibrium with underinsurance may exist.

Suggested Citation

  • Jorge Lemus & Emil Temnyalov & John L. Turner, 2021. "Liability Insurance: Equilibrium Contracts under Monopoly and Competition," American Economic Journal: Microeconomics, American Economic Association, vol. 13(1), pages 83-115, February.
    • Handle: RePEc:aea:aejmic:v:13:y:2021:i:1:p:83-115
    DOI: 10.1257/mic.20180245
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    Cited by:

    1. Junhao Zhong & Zhenzhen Wang & Yunfeng Deng, 2025. "Driving the Green Transformation of Enterprises: The Role of Patent Insurance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 46(2), pages 1373-1391, March.
    2. Bessen, James & Neuhäusler, Peter & Turner, John L. & Williams, Jonathan, 2018. "Trends in private patent costs and rents for publicly-traded United States firms," International Review of Law and Economics, Elsevier, vol. 56(C), pages 53-69.
    3. Bernhard Ganglmair & Christian Helmers & Brian J Love, 2022. "The Effect of Patent Litigation Insurance: Theory and Evidence from NPEs [“Valuable Patents]," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 38(3), pages 741-773.

    More about this item

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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