EconPapers    
Economics at your fingertips  
 

Equilibrium in Competitive Insurance Markets with Moral Hazard

Richard Arnott () and Joseph Stiglitz

No 3588, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the existence and nature of competitive equilibrium with moral hazard. The more insurance an individual has, the less care will he take. Consequently, insurance firms attempt to restrict their clients' aggregate insurance purchases. If individuals' aggregate insurance purchases are observable, each firm will ration the amount of insurance its clients can purchase and insist that they purchase no insurance from other firms. This paper focuses on the alternative situation where firms cannot observe their clients' aggregate insurance purchases. We show that firms will still attempt to restrict their clients' aggregate purchases, but now they must do so indirectly. One possibility is that all firms sell only policies with a sufficiently large amount of coverage that individuals choose to purchase insurance from only one firm. Another possibility is that each firm offers a latent policy in addition to its regular policy. Latent policies are not purchased in equilibrium, but serve to restrict entry. If an entering firm offers a supplementary policy, an individual will purchase not only this policy plus his previous policy but also the latent policy. The latent policy is designed so that the individual reduces effort by enough to render any entering policy unprofitable.

Date: 1991-01
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (32) Track citations by RSS feed

Downloads: (external link)
http://www.nber.org/papers/w3588.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:3588

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w3588

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2018-10-06
Handle: RePEc:nbr:nberwo:3588