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Equilibrium in Competitive Insurance Markets: The Welfare Economics of Moral Hazard


  • Richard Arnott
  • Joseph Stiglitz


This paper examines the existence and properties of competitive equilibrium in economies with moral hazard. The nature of competitive equilibrium depends on whether insurers can observe an insured's total purchases of insurance. If insurers can observe this, an individual will purchase all his insurance from a single agent, and the contract will specify the price but also ration the quantity. If insurers cannot observe this, then a competitive equilibrium may not exist. Equilibrium may be characterized by random insurance.

Suggested Citation

  • Richard Arnott & Joseph Stiglitz, 1982. "Equilibrium in Competitive Insurance Markets: The Welfare Economics of Moral Hazard," Working Papers 483, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:483

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    References listed on IDEAS

    1. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters,in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
    2. Bulkley, George, 1981. "Personal Savings and Anticipated Inflation," Economic Journal, Royal Economic Society, vol. 91(361), pages 124-135, March.
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    Cited by:

    1. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
    2. Hadi Dowlatabadi, 2007. "On integration of policies for climate and global change," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 12(5), pages 651-663, June.

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