IDEAS home Printed from https://ideas.repec.org/a/bla/scandj/v97y1995i1p123-35.html
   My bibliography  Save this article

Second-Best Insurance Contract Design in an Incomplete Market

Author

Listed:
  • Gollier, Christian
  • Schlesinger, Harris

Abstract

The optimal form of insurance contracts for multiple risks is examined. A well-known result in the literature is that, under fairly general conditions, an insurance policy with a deductible for aggregate losses is optimal. Real-world markets, however, are typically incomplete in that they require separate contracts for separate loss exposures. For instance, insurable damage to one's home is not generally allowed to affect the insurance indemnity for (unrelated) insurable damage to one's automobile. We show that separate deductibles are second-best optima in this setting. We compare the indemnity provided in this second-best setting with first-best solutions. The effect of second-best contracts on the individual's total insurance demand is also examined. Copyright 1995 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Gollier, Christian & Schlesinger, Harris, 1995. " Second-Best Insurance Contract Design in an Incomplete Market," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(1), pages 123-135, March.
  • Handle: RePEc:bla:scandj:v:97:y:1995:i:1:p:123-35
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below 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.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Joshua D. Angrist & Alan B. Keueger, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 979-1014.
    2. Fersterer, Josef & Winter-Ebmer, Rudolf, 2003. "Are Austrian returns to education falling over time?," Labour Economics, Elsevier, pages 73-89.
    3. Daron Acemoglu & Jörn-Steffen Pischke, 1998. "Why Do Firms Train? Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, pages 79-119.
    4. Margo, Robert A., 2000. "Wages and Labor Markets in the United States, 1820-1860," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226505077.
    5. Fersterer, Josef & Winter-Ebmer, Rudolf, 2003. "Smoking, discount rates, and returns to education," Economics of Education Review, Elsevier, vol. 22(6), pages 561-566, December.
    6. Gerard A. Pfann & Daniel S. Hamermesh, 2001. "Two-Sided Learning, Labor Turnover and Displacement," NBER Working Papers 8273, National Bureau of Economic Research, Inc.
    7. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-475, March.
    8. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    9. Freeman, Richard & Schettkat, Ronald, 2001. "Skill Compression, Wage Differentials, and Employment: Germany vs the US," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 582-603, July.
    10. James Heckman, 1993. "Assessing Clinton's Program on Job Training, Workfare, and Education in the Workplace," NBER Working Papers 4428, National Bureau of Economic Research, Inc.
    11. Ichino, Andrea & Winter-Ebmer, Rudolf, 1999. "Lower and upper bounds of returns to schooling: An exercise in IV estimation with different instruments," European Economic Review, Elsevier, pages 889-901.
    12. Wolfgang Franz & Joachim Inkmann & Winfried Pohlmeier & Volker Zimmermann, 2000. "Young and Out in Germany (On Youths? Chances of Labor Market Entrance in Germany)," NBER Chapters,in: Youth Employment and Joblessness in Advanced Countries, pages 381-426 National Bureau of Economic Research, Inc.
    13. Hilary Steedman, 2001. "Benchmarking Apprenticeship: UK and Continental Europe Compared," CEP Discussion Papers dp0513, Centre for Economic Performance, LSE.
    14. Wolfgang Franz & Joachim Inkmann & Winfried Pohlmeier & Volker Zimmermann, 1997. "Young and Out in Germany: On the Youths' Chances of Labor Market Entrance in Germany," NBER Working Papers 6212, National Bureau of Economic Research, Inc.
    15. Paul Ryan, 2001. "The School-to-Work Transition: A Cross-National Perspective," Journal of Economic Literature, American Economic Association, pages 34-92.
    16. David Soskice, 1994. "Reconciling Markets and Institutions: The German Apprenticeship System," NBER Chapters,in: Training and the Private Sector: International Comparisons, pages 25-60 National Bureau of Economic Research, Inc.
    17. Nickell, Stephen & Bell, Brian, 1996. "Changes in the Distribution of Wages and Unemployment in OECD Countries," American Economic Review, American Economic Association, pages 302-308.
    18. Steedman, Hilary, 2001. "Benchmarking apprenticeship: UK and continental Europe compared," LSE Research Online Documents on Economics 20098, London School of Economics and Political Science, LSE Library.
    19. J.D. Angrist & Guido W. Imbens & D.B. Rubin, 1993. "Identification of Causal Effects Using Instrumental Variables," NBER Technical Working Papers 0136, National Bureau of Economic Research, Inc.
    20. Richard B. Freeman & Lawrence F. Katz, 1995. "Differences and Changes in Wage Structures," NBER Books, National Bureau of Economic Research, Inc, number free95-1.
    21. Andrea Ichino & Rudolf Winter-Ebmer, 2004. "The Long-Run Educational Cost of World War II," Journal of Labor Economics, University of Chicago Press, vol. 22(1), pages 57-86, January.
    22. Freeman, Richard B. & Katz, Lawrence F. (ed.), 1995. "Differences and Changes in Wage Structures," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226261607.
    23. Paul Ryan, 2001. "The School-to-Work Transition: A Cross-National Perspective: Corrigendum," Journal of Economic Literature, American Economic Association, pages 767-767.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Neil A. Doherty & Christian Laux & Alexander Muermann, 2015. "Insuring Nonverifiable Losses," Review of Finance, European Finance Association, pages 283-316.
    2. Michael Breuer, 2005. "Multiple Losses, "EX ANTE" Moral Hazard, and the Implications for Umbrella Policies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(4), pages 525-538.
    3. Moore, Kristen S. & Young, Virginia R., 2006. "Optimal insurance in a continuous-time model," Insurance: Mathematics and Economics, Elsevier, pages 47-68.
    4. Diana SOARE (DUMITRESCU) & Alexandru URSACHE & Olivia Georgiana NITA, 2015. "Aspects of Decisions in the Field of Insurance," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 63(10), pages 22-26, October.
    5. Carole Bernard & Shaolin Ji & Weidong Tian, 2013. "An optimal insurance design problem under Knightian uncertainty," Decisions in Economics and Finance, Springer;Associazione per la Matematica, pages 99-124.
    6. Ryle Perera, 2013. "Optimal investment, consumption–leisure, insurance and retirement choice," Annals of Finance, Springer, pages 689-723.
    7. Laux, Christian, 2008. "Corporate insurance design with multiple risks and moral hazard," CFS Working Paper Series 2008/54, Center for Financial Studies (CFS).
    8. Cohen Alma, 2006. "The Disadvantages of Aggregate Deductibles," The B.E. Journal of Economic Analysis & Policy, De Gruyter, pages 1-28.
    9. Bovenberg, A.L. & Hansen, M. & Sorensen, P.B., 2008. "Individual savings accounts for social insurance : Rationale and alternative designs," Other publications TiSEM 72e236b0-ad63-4bea-a314-6, Tilburg University, School of Economics and Management.
    10. Malamud, Semyon & Rui, Huaxia & Whinston, Andrew, 2016. "Optimal reinsurance with multiple tranches," Journal of Mathematical Economics, Elsevier, vol. 65(C), pages 71-82.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:scandj:v:97:y:1995:i:1:p:123-35. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.