La Crema: A Case Study of Mutual Fire Insurance

UPF Economics and Business Working Paper No. 518

30 Pages Posted: 31 Jul 2001

See all articles by Antonio Cabrales

Antonio Cabrales

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Antoni Calvo-Armengol

Autonomous University of Barcelona - Department of Economics; IZA Institute of Labor Economics

Matthew O. Jackson

Stanford University - Department of Economics; Santa Fe Institute; Canadian Institute for Advanced Research (CIFAR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2001

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 eficient 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 where 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 of the non-degenerate equilibria of the mechanism are nearly truthful and approximately Pareto efficient.

Keywords: Insurance, contract theory, mechanism design, truthful revelation

JEL Classification: A13, C72, D64, D80

Suggested Citation

Cabrales, Antonio and Calvo-Armengol, Antoni and Jackson, Matthew O., La Crema: A Case Study of Mutual Fire Insurance (February 2001). UPF Economics and Business Working Paper No. 518. Available at SSRN: https://ssrn.com/abstract=273401 or http://dx.doi.org/10.2139/ssrn.273401

Antonio Cabrales (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 27 65 (Phone)
(34-93) 542 17 46 (Fax)

Antoni Calvo-Armengol

Autonomous University of Barcelona - Department of Economics ( email )

Campus Bellaterra
Barcelona, 08193
Spain
+34 93 581 3068 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Matthew O. Jackson

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
1-650-723-3544 (Phone)

HOME PAGE: http://www.stanford.edu/~jacksonm

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Canadian Institute for Advanced Research (CIFAR) ( email )

180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada

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