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La Crema: A case study of mutual fire insurance

Author

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  • Antonio Cabrales
  • Antoni Calvó
  • Matthew O. Jackson

Abstract

We analyze a mutual fire insurance mechanism used in Andorra, which is called La Crema in the local language. This mechanism relies on households' announced property values to determine how much a household is reimbursed in the case of a fire and how payments are apportioned among other households. The only Pareto eficient allocation reachable through the mechanism requires that all households honestly report the true value of their property. However, such honest reporting is not an equilibrium except in the extreme case where the property values are identical for all households. Nevertheless, as the size of the society becomes large, the benefits from deviating from truthful reporting vanish, and all of the non-degenerate equilibria of the mechanism are nearly truthful and approximately Pareto efficient.

Suggested Citation

  • Antonio Cabrales & Antoni Calvó & Matthew O. Jackson, 2000. "La Crema: A case study of mutual fire insurance," Economics Working Papers 518, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:518
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    References listed on IDEAS

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    1. Paul Bennett, 2000. "Mutuality at a Distance? Risk and Regulation in Marine Insurance Clubs," Environment and Planning A, , vol. 32(1), pages 147-163, January.
    2. Besley, Timothy & Coate, Stephen & Loury, Glenn, 1993. "The Economics of Rotating Savings and Credit Associations," American Economic Review, American Economic Association, vol. 83(4), pages 792-810, September.
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    4. Timothy Besley & Stephen Coate & Glenn Loury, 1994. "Rotating Savings and Credit Associations, Credit Markets and Efficiency," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 701-719.
    5. Gulley, O. David & Scott, Frank A. Jr., 1989. "Lottery Effects on Pari-Mutuel Tax Revenues," National Tax Journal, National Tax Association;National Tax Journal, vol. 42(1), pages 89-93, March.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Daniel J. Clarke, 2011. "Reinsuring the Poor: Group Microinsurance Design and Costly State Verification," Economics Series Working Papers 573, University of Oxford, Department of Economics.
    2. Catarina Goulão & Luca Panaccione, 2015. "Pooling promises with moral hazard," Economics Bulletin, AccessEcon, vol. 35(1), pages 460-465.
    3. Lindner, Peter & Mathä, Thomas Y. & Ziegelmeyer, Michael & Pulina, Giuseppe, 2020. "Borrowing constraints, own labour and homeownership: does it pay to paint your walls?," Working Paper Series 2474, European Central Bank.
    4. Putman, Daniel S., 2020. "The Scope of Risk Pooling," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304480, Agricultural and Applied Economics Association.
    5. Shimoji, Makoto & Schweinzer, Paul, 2015. "Implementation without incentive compatibility: Two stories with partially informed planners," Games and Economic Behavior, Elsevier, vol. 91(C), pages 258-267.
    6. Harri Talonen & Antti Talonen & Jari Stenvall & Tony Kinder, 2021. "Communicating Customer Ownership in Annual Reports: Perspective of Hedonic Value," FIIB Business Review, , vol. 10(2), pages 120-132, June.
    7. Antti Talonen & Harri Talonen & Jari Stenvall & Iiro Jussila, 2020. "Communicating the economic value of customer ownership in insurance: A qualitative analysis of annual reports," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(3), pages 243-267, September.
    8. Kaivan Munshi & Mark Rosenzweig, 2013. "Networks, Commitment, and Competence: Caste in Indian Local Politics," NBER Working Papers 19197, National Bureau of Economic Research, Inc.
    9. Jakša Krišto & Antti Talonen & Hrvoje Pauković, 2021. "Analysis of community‐owned mutual insurers' prospects of development in CEE countries: Outlining research agenda," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 24(3), pages 243-261, September.
    10. Assefa, Tsion Taye & Meuwissen, Miranda P.M. & Van Asseldonk, Marcel A.P.M., "undated". "Mutual insurance companies as a tool for farmer income stabilization: performance and prospects in the CAP," 126th Seminar, June 27-29, 2012, Capri, Italy 125991, European Association of Agricultural Economists.
    11. Lanny Arvan & David Nickerson, 2006. "Private Investment, Public Aid and Endogenous Divergence in the Evolution of Urban Neighborhoods," The Journal of Real Estate Finance and Economics, Springer, vol. 32(1), pages 83-100, February.
    12. Roberto Serrano, 2003. "The Theory of Implementation of Social Choice Rules," Working Papers 2003-19, Brown University, Department of Economics.
    13. Lee Cronk & Athena Aktipis, 2021. "Design principles for risk-pooling systems," Nature Human Behaviour, Nature, vol. 5(7), pages 825-833, July.

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    More about this item

    Keywords

    Insurance; contract theory; mechanism design; truthful revelation;
    All these keywords.

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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