Participating Insurance Contracts and the Rothschild-Stiglitz Equilibrium Puzzle
We extend the Rothschild-Stiglitz (RS) insurance market model with adverse selection by allowing insurers to offer either non-participating or participating policies, that is, insurance contracts with policy dividends or supplementary calls for premium. It is shown that an equilibrium always exists in such a setting. Participating policies act as an implicit threat that dissuades deviant insurers who aim to attract low-risk individuals only. The model predicts that the mutual corporate form should be prevalent in insurance markets where second-best Pareto efficiency requires cross-subsidisation between risk types.
Year of publication: |
2014
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Authors: | Picard, Pierre |
Published in: |
The Geneva Risk and Insurance Review. - Palgrave Macmillan, ISSN 1554-964X. - Vol. 39.2014, 2, p. 153-175
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Publisher: |
Palgrave Macmillan |
Saved in:
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