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Participating Insurance Contracts and the Rothschild-Stiglitz Equilibrium Puzzle

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  • Pierre Picard

    (Department of Economics, Ecole Polytechnique, Route de Saclay, 91128, Palaiseau Cedex, France.)

Abstract

We extend the Rothschild-Stiglitz (RS) insurance market model with adverse selection by allowing insurers to offer either non-participating or participating policies, that is, insurance contracts with policy dividends or supplementary calls for premium. It is shown that an equilibrium always exists in such a setting. Participating policies act as an implicit threat that dissuades deviant insurers who aim to attract low-risk individuals only. The model predicts that the mutual corporate form should be prevalent in insurance markets where second-best Pareto efficiency requires cross-subsidisation between risk types.

Suggested Citation

  • Pierre Picard, 2014. "Participating Insurance Contracts and the Rothschild-Stiglitz Equilibrium Puzzle," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(2), pages 153-175, September.
    • Handle: RePEc:pal:genrir:v:39:y:2014:i:2:p:153-175
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