Risk-sharing with self-insurance: the role of cooperation
We analyze mutual insurance arrangements (policies based on risk-sharing among a pool of policyholders) when consumers choose a self-insurance effort, that is an effort decreasing the size of any loss occurring. We consider both cooperative and non-cooperative strategies in the effort choice. Cooperation among policyholders leads to the full internalization of the positive impact the effort exerts on the premium. We show that, for an infinite size of pool, with cooperation first-best efficiency is achieved. Moreover, cooperation is sustained as an equilibrium in a repeated interaction game for a sufficiently low size of pool. An interesting implication of our results is that a cooperative mutual policy can dominate a stock insurance contract. Simulations show that mutual insurance with cooperation as an equilibrium dominates a second-best stock-type insurance policy even when pool size is low.
|Date of creation:||01 Jul 2011|
|Date of revision:|
|Note:||View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00605267/en/|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
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.:
- Smith, Bruce D & Stutzer, Michael J, 1990. "Adverse Selection, Aggregate Uncertainty, and the Role for Mutual Insurance Contracts," The Journal of Business, University of Chicago Press, vol. 63(4), pages 493-510, October.
- Smith, Bruce D & Stutzer, Michael, 1995. "A Theory of Mutual Formation and Moral Hazard with Evidence from the History of the Insurance Industry," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 545-77.
- Donald Meyer & Jack Meyer, 2005. "Relative Risk Aversion: What Do We Know?," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 243-262, December.
- Pierre Picard, 2009.
"Participating insurance contracts and the Rothschild-Stiglitz equilibrium puzzle,"
- Pierre Picard, 2014. "Participating Insurance Contracts and the Rothschild-Stiglitz Equilibrium Puzzle," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 39(2), pages 153-175, September.
- Raj Chetty, 2003.
"A New Method of Estimating Risk Aversion,"
NBER Working Papers
9988, National Bureau of Economic Research, Inc.
- Richard Arnott & Joseph E. Stiglitz, 1988.
"Randomization with Asymmetric Information,"
RAND Journal of Economics,
The RAND Corporation, vol. 19(3), pages 344-362, Autumn.
- Richard J. Arnott & Joseph E. Stiglitz, 1988. "Randomization with Asymmetric Information," NBER Working Papers 2507, National Bureau of Economic Research, Inc.
- Richard Arnott & Joseph E Stiglitz, 2010. "Randomization with Asymmetric Information," Levine's Working Paper Archive 2054, David K. Levine.
- Mayers, David & Smith, Clifford W, Jr, 1988. "Ownership Structure across Lines of Property-Casualty Insurance," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 351-78, October.
- Mayers, David & Smith, Clifford Jr., 1986. "Ownership structure and control : The mutualization of stock life insurance companies," Journal of Financial Economics, Elsevier, vol. 16(1), pages 73-98, May.
- Timothy Besley & Maitreesh Ghatak, 2005.
"Competition and Incentives with Motivated Agents,"
American Economic Review,
American Economic Association, vol. 95(3), pages 616-636, June.
- Besley, Timothy J. & Ghatak, Maitreesh, 2004. "Competition and Incentives with Motivated Agents," CEPR Discussion Papers 4641, C.E.P.R. Discussion Papers.
- Tim Besley & Maitreesh Ghatak, 2005. "Competition and incentives with motivated agents," LSE Research Online Documents on Economics 928, London School of Economics and Political Science, LSE Library.
- Timothy Besley & Maitreesh Ghatak, 2003. "Competition and incentives with motivated agents," LSE Research Online Documents on Economics 2202, London School of Economics and Political Science, LSE Library.
- Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug..
- Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 77(3), pages 251-77, June.
- James A. Ligon & Paul D. Thistle, 2005. "The Formation of Mutual Insurers in Markets with Adverse Selection," The Journal of Business, University of Chicago Press, vol. 78(2), pages 529-556, March.
- Doherty, Neil A & Dionne, Georges, 1993. " Insurance with Undiversifiable Risk: Contract Structure and Organizational Form of Insurance Firms," Journal of Risk and Uncertainty, Springer, vol. 6(2), pages 187-203, April.
- Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
- James A. Ligon & Paul D. Thistle, 2008. "Moral Hazard and Background Risk in Competitive Insurance Markets," Economica, London School of Economics and Political Science, vol. 75(300), pages 700-709, November.
When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:halshs-00605267. 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: (CCSD)
If references are entirely missing, you can add them using this form.