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Bargaining power and efficiency in principal-agent relationships

Author

Listed:
  • John Quiggin

    (Department of Economics, University of Queensland)

  • Robert G. Chambers

    (Dept of Agricultural and Resource Economics, University of Maryland, College Park)

Abstract

Insurance contracts are frequently modelled as principal--agent relationships. Although it is commonly assumed that the principal, in this case the insurer, has complete freedom to design the contract, the problem formulation in much of the principal--agent literature presumes that the contract is constrained-Pareto-efficient. In the present paper, we consider the implications of a richer specification of the choices available to clients. In particular, we consider the entire spectrum of possible power differentials in the contracting relationship between insurers and clients. Our central result is that the agent can exploit information asymmetries to offset the bargaining power of the insurer, but that this process is socially costly.

Suggested Citation

  • John Quiggin & Robert G. Chambers, 2003. "Bargaining power and efficiency in principal-agent relationships," Risk & Uncertainty Working Papers WPR03_1, Risk and Sustainable Management Group, University of Queensland, revised Aug 2003.
    • Handle: RePEc:rsm:riskun:r03_1
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    File URL: http://www.uq.edu.au/rsmg/WP/WPR03_1.pdf
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    Keywords

    Bargaining power; efficiency; principal-agent;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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