Second-best insurance contract design in an incomplete market

Christian Gollier () and Harris Schlesinger

No 1992012, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper considers the optimal form of insurance contracts for multiple risks. A well-known result in the literature is that, under fairly general conditions, an insurance policy with a deductible for aggregate losses is optimal. We provide a new proof of this result based only on stochastic dominance (whereas existing proofs require dynamic optimization techniques). Considering a real-world incompleteness, whereby separate loss exposures are indemnified via separate contracts, we show that separate deductibles are second-best optima in this setting. We compare the indemnity provided in this second-best setting with first-best solutions. The effect of second-best contracts on the individual's total insurance demand is also examined.

Date: 1992-02-01
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:1992012

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