Designing insurance markets with moral hazard and nonexclusive contracts

Alessandro Citanna, P. Siconolfi

Research output: Contribution to journalArticle

Abstract

We design competitive markets in large insurance economies with moral hazard, under the additional constraint that contracts may be nonexclusive. In particular, we consider the situation where contracts are verifiable and enforceable within a local market, but globally, i.e., across markets, they are not. Agents can buy (or sell) insurance contracts in multiple markets subject to a (global) budget constraint. Because of local exclusivity, at equilibrium firms make zero profits. Although equilibria are indeterminate, the incentive efficient contract may not be an equilibrium. However, with a Wilsonian or a forward induction refinement, we show that equilibrium is ‘third best’ efficient.

Original languageEnglish (US)
Pages (from-to)325-360
Number of pages36
JournalEconomic Theory
Volume62
Issue number1-2
DOIs
StatePublished - Jun 1 2016

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Keywords

  • Competitive markets
  • Constrained efficiency
  • Decentralization
  • Moral hazard
  • Nonexclusivity

ASJC Scopus subject areas

  • Economics and Econometrics

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