Insurance monopoly and renegotiation (*)
Geir Asheim () and
Tore Nilssen ()
Economic Theory, 1997, vol. 9, issue 2, 354 pages
The mechanism design problem of a monopoly insurer - faced with privately informed insurees - is considered. It is assumed that the insurer cannot commit not to renegotiate (by using the information that customer separa-tion reveals) before contracts are put into force. A solution is offered by modeling renegotiation-proofness in a framework inspired by Greenberg's theory of social situations. Maximizing profit within the set of renegotiation-proof outcomes always leads to a semi-separating outcome (i.e. neither full pooling nor full separation can occur) and may leave all low-risks as well as some of the high-risks self-insured.
Note: Received: March 1, 1994; revised version September 16, 1995
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