Stackelberg equilibria with multiple policyholders

Mario Ghossoub and Michael B. Zhu

Insurance: Mathematics and Economics, 2024, vol. 116, issue C, 189-201

Abstract: We examine Pareto-efficient contracts and Stackelberg Equilibria (SE) in a sequential-move insurance market in which a central monopolistic insurer on the supply side contracts with multiple policyholders on the demand side. We obtain a representation of Pareto-efficient contracts when the monopolistic insurer's preferences are represented by a coherent risk measure. We then obtain a representation of SE in this market, and we show that the contracts induced by an SE are Pareto-efficient. However, we note that SE do not induce a welfare gain to the policyholders in this case, echoing the conclusions of recent work in the literature. The social welfare implications of this finding are examined through an application to the flood insurance market of the United States of America, in which we find that the central insurer has a strong incentive to raise premia to the detriment of the policyholders. Accordingly, we argue that monopolistic insurance markets are problematic, and must be appropriately addressed by external regulation.

Keywords: Optimal (re)insurance; Bowley optima; Stackelberg equilibria; Pareto efficiency; Choquet pricing; Coherent risk measures; Heterogeneous beliefs; Flood risk (search for similar items in EconPapers)
JEL-codes: C02 C62 C79 D86 G22 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:116:y:2024:i:c:p:189-201

DOI: 10.1016/j.insmatheco.2024.02.008

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