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Reinsuring the Poor: Group Microinsurance Design and Costly State Verification

  • Daniel J. Clarke

This paper analyses collusion-proof multilateral insurance contracts between a risk neutral insurer and multiple risk averse agents in an environment of asymmetric costly state verification.� Optimal contracts involve the group of agents pooling uncertainty and the insurer acting as reinsurer to the group, auditing and paying a claim only when the group or a sub-group has incurred a large enough aggregate loss.� We interpret our models as providing support for insurance contracts between insurance providers, such as microinsurers or governments, and groups of individuals who have access to cheap information about each other, such as extended families or members of close-knit communities.� Such formal contracts complement, and could even crowd in, cheap nonmarket insurance arrangements.

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File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper573.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 573.

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Date of creation: 01 Oct 2011
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Handle: RePEc:oxf:wpaper:573
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  1. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
  2. Bond, Eric W. & Crocker, Keith J., 1997. "Hardball and the soft touch: The economics of optimal insurance contracts with costly state verification and endogenous monitoring costs," Journal of Public Economics, Elsevier, vol. 63(2), pages 239-264, January.
  3. repec:oup:restud:v:61:y:1994:i:3:p:495-526 is not listed on IDEAS
  4. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
  5. Jere R. Behrman & Anil B. Deolalikar, 1990. "The Intrahousehold Demand for Nutrients in Rural South India: Individual Estimates, Fixed Effects, and Permanent Income," Journal of Human Resources, University of Wisconsin Press, vol. 25(4), pages 665-696.
  6. Stefan Dercon & Tessa Bold, 2004. "Group-based Funeral Insurance in Ethiopia and Tanzania," Economics Series Working Papers WPS/2004-27, University of Oxford, Department of Economics.
  7. Marie-Cécile Fagart & Pierre Picard, 1999. "Optimal Insurance Under Random Auditing," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 24(1), pages 29-54, June.
  8. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  9. Maitreesh Ghatak & Timothy W. Guinnane, 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Working Papers 791, Economic Growth Center, Yale University.
  10. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-90, March.
  11. Olivier Mahul & Charles J. Stutley, 2010. "Government Support to Agricultural Insurance : Challenges and Options for Developing Countries," World Bank Publications, The World Bank, number 2432, June.
  12. Marcel Fafchamps & Susan Lund, 2000. "Risk-Sharing Networks in Rural Philippines," Economics Series Working Papers 10, University of Oxford, Department of Economics.
  13. repec:oup:restud:v:69:y:2002:i:1:p:209-44 is not listed on IDEAS
  14. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  15. Dercon, Stefan (ed.), 2004. "Insurance Against Poverty," OUP Catalogue, Oxford University Press, number 9780199276837, July.
  16. Winton, Andrew, 1995. "Costly State Verification and Multiple Investors: The Role of Seniority," Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 91-123.
  17. Laffont, Jean-Jacques & Martimort, David, 1998. "Mechanism Design with Collusion and Correlation," IDEI Working Papers 81, Institut d'Économie Industrielle (IDEI), Toulouse.
  18. Picard, Pierre, 2000. "On the Design of Optimal Insurance Policies under Manipulation of Audit Cost," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(4), pages 1049-71, November.
  19. Paul Bennett, 2000. "Mutuality at a distance? Risk and regulation in marine insurance clubs," Environment and Planning A, Pion Ltd, London, vol. 32(1), pages 147-163, January.
  20. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  21. Daniel J. Clarke, 2011. "A Theory of Rational Demand for Index Insurance," Economics Series Working Papers 572, University of Oxford, Department of Economics.
  22. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  23. Olivier Mahul, 1999. "Optimum Area Yield Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 75-82.
  24. repec:oup:restud:v:64:y:1997:i:3:p:311-35 is not listed on IDEAS
  25. Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
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