Liability Insurance: Equilibrium Contracts under Monopoly and Competition

Jorge Lemus, Emil Temnyalov and John Turner ()

No 2019/11, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: In liability lawsuits (e.g. product liability or patent infringement), a third party demands compensation from a firm. Verifying that the firm harmed the third party requires a costly lawsuit, so parties often negotiate a settlement agreement. Liability insurance improves the firm�s bargaining leverage when negotiating this settlement. We study this leverage effect of insurance and characterize equilibrium contracts under symmetric and asymmetric information: in a competitive market, only a pooling equilibrium with under-insurance may exist; in a monopolistic setting, the insurer offers at most two contracts which under-insure low-risk types and may inefficiently induce high-risk types to litigate.

Keywords: liability; insurance; litigation; bargaining; adverse selection; competitive equilibrium; monopoly (search for similar items in EconPapers)
JEL-codes: C7 D82 G22 K1 K41 (search for similar items in EconPapers)
Pages: 83 pages
Date: 2019-07-01
New Economics Papers: this item is included in nep-com, nep-cta, nep-ias, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Liability Insurance: Equilibrium Contracts under Monopoly and Competition (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:uts:ecowps:2019/11

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