Nonlinear Incentive Provision in Walrasian Markets: A Cournot Convergence Approach

Martin Hellwig

No 2004_8, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: The paper studies insurance with moral hazard in a system of contingent-claims markets. Insurance buyers are modelled as Cournot monopolists or oligopolists. The other agents condition their expectations on market prices, as in models of rational-expectations equilibrium with asymmetric information. Thereby they correctly anticipate accident probabilities corresponding to effort incentives induced by insurance buyers’ net trades. When there are many agents to share the insurance buyer’s risk, Cournot equilibrium outcomes are close to being second-best. In contrast, if insurance buyers are price takers, equilibria fail to exist or are bounded away from being second-best.

Keywords: Insurance; Moral Hazard; Incentive Contracting; Walrasian Markets; Rational-Expectations; Cournot Equilibrium (search for similar items in EconPapers)
JEL-codes: D50 D62 D80 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2004-08
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Citations:

Published in Journal of Economic Theory 120 (2005), 1-38.

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Journal Article: Nonlinear incentive provision in Walrasian markets: a Cournot convergence approach (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:mpg:wpaper:2004_08

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