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Pool size and the sustainability of optimal risk-sharing agreements

Francesca Barigozzi, Renaud Bourlès (), Dominique Henriet and Giuseppe Pignataro ()
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Giuseppe Pignataro: University of Bologna

Theory and Decision, 2017, vol. 82, issue 2, 273-303

Abstract: Abstract We study a risk-sharing agreement where members exert a loss-mitigating action which decreases the amount of reimbursements to be paid in the pool. The action is costly and members tend to free-ride on it. An optimal risk-sharing agreement maximizes the expected utility of a representative member with respect to both the coverage and the (collective) action such that efficiency is restored. We study the sustainability of the optimal agreement as equilibrium in a repeated game with indefinite number of repetitions. When the optimal agreement is not enforceable, the equilibrium with free-riding emerges. We identify an interesting trade-off: welfare generated by the optimal risk-sharing agreement increases with the size of the pool, but at the same time the pool size must not be too large for collective choices to be self-enforcing. This generates a discontinuous effect of pool size on welfare.

Keywords: Optimal risk-sharing agreement; Loss-mitigating actions; Repeated interactions; Collectively optimal vs Nash behaviors (search for similar items in EconPapers)
Date: 2017
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Related works:
Working Paper: Pool size and the sustainability of optimal risk-sharing agreements (2017)
Working Paper: Improving Compliance With Preventive Care: Cooperation in Mutual Health Insurance (2011) Downloads
Working Paper: Risk-sharing with self-insurance: the role of cooperation (2011) Downloads
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