La Crema: A Case Study of Mutual Fire Insurance
UPF Economics and Business Working Paper No. 518
30 Pages Posted: 31 Jul 2001
Date Written: February 2001
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: Suggested Citation