Liability Insurance: Equilibrium Contracts under Monopoly and Competition

Jorge Lemus, Emil Temnyalov and John L. Turner

American Economic Journal: Microeconomics, 2021, vol. 13, issue 1, 83-115

Abstract: In liability lawsuits (e.g., patent infringement), a plaintiff demands compensation from a defendant, and the parties often negotiate a settlement to avoid a costly trial. Liability insurance creates bargaining leverage for the defendant in this settlement negotiation. We study the characteristics of monopoly and equilibrium contracts in settings where this leverage effect is a substantial source of value for insurance. Our results show that under adverse selection, a monopolist offers at most two contracts, which underinsure low-risk types and may inefficiently induce high-risk types to litigate. In a competitive market, only a pooling equilibrium with underinsurance may exist.

JEL-codes: D41 D42 D82 D86 G22 K13 K41 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Working Paper: Liability Insurance: Equilibrium Contracts under Monopoly and Competition (2019)
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DOI: 10.1257/mic.20180245

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