La Crema: A Case Study of Mutual Fire Insurance

Antonio Cabreales, Antoni Calvó-Armengol and Matthew Jackson
Authors registered in the RePEc Author Service: Antonio Cabrales

Journal of Political Economy, 2003, vol. 111, issue 2, 425-458

Abstract: We analyze a mutual fire insurance mechanism used in Andorra, which is called La Crema in the local language. This mechanism relies on households' announced property values to determine how much a household is reimbursed in the case of a fire and how payments are apportioned among other households. The only Pareto-efficient allocation reachable through the mechanism requires that all households honestly report the true value of their property. However, such honest reporting is not an equilibrium except in the extreme case in which the property values are identical for all households. Nevertheless, as the size of the society becomes large, the benefits from deviating from truthful reporting vanish, and all the nondegenerate equilibria of the mechanism are nearly truthful and approximately Pareto efficient.

Date: 2003
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Working Paper: La Crema: A case study of mutual fire insurance (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:v:111:y:2003:i:2:p:425-458

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