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Designing insurance markets with moral hazard and nonexclusive contracts

Author

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  • A. Citanna

    (Yeshiva University)

  • P. Siconolfi

    (Columbia University)

Abstract

We design competitive markets in large insurance economies with moral hazard, under the additional constraint that contracts may be nonexclusive. In particular, we consider the situation where contracts are verifiable and enforceable within a local market, but globally, i.e., across markets, they are not. Agents can buy (or sell) insurance contracts in multiple markets subject to a (global) budget constraint. Because of local exclusivity, at equilibrium firms make zero profits. Although equilibria are indeterminate, the incentive efficient contract may not be an equilibrium. However, with a Wilsonian or a forward induction refinement, we show that equilibrium is ‘third best’ efficient.

Suggested Citation

  • A. Citanna & P. Siconolfi, 2016. "Designing insurance markets with moral hazard and nonexclusive contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 325-360, June.
    • Handle: RePEc:spr:joecth:v:62:y:2016:i:1:d:10.1007_s00199-015-0911-x
    DOI: 10.1007/s00199-015-0911-x
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    References listed on IDEAS

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    Cited by:

    1. Alex Citanna & Paolo Siconolfi, 2020. "Constrained Efficient Markets For Manipulation Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(4), pages 1531-1567, November.

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    More about this item

    Keywords

    Moral hazard; Nonexclusivity; Competitive markets; Decentralization; Constrained efficiency;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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