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Price Equilibrium, Efficiency, and Decentralizability in Insurance Markets

  • Richard Arnott
  • Joseph E. Stiglitz

In this paper, we investigate the descriptive and normative properties of competitive equilibrium with moral hazard when firms offer "price contracts" which allow clients to purchase as much insurance as they wish at the quoted prices. We show that a price equilibrium always exists and is one of three types: i) zero profit price equilibrium - zero profit, zero effort, full insurance ii) positive profit price equilibrium - positive profit, positive effort, partial insurance iii) zero insurance price equilibrium - zero insurance, zero profit, positive effort. We also demonstrate circumstances under which the linear taxation of price insurance allows decentralization of the social optimum (conditional on the unobservability of effort), and when it, does not, whether it is at least utility-improving.

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File URL: http://www.nber.org/papers/w3642.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3642.

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Date of creation: Mar 1991
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Handle: RePEc:nbr:nberwo:3642
Note: PE
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