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Market Power and Asset Contractibility in Dynamic Insurance Contracts

18 Pages Posted: 22 Jun 2016  

Alexander Karaivanov

Simon Fraser University (SFU) - Department of Economics

Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: 2016

Abstract

The authors study the roles of asset contractibility, market power, and rate of return differentials in dynamic insurance when the contracting parties have limited commitment. They define, characterize, and compute Markov-perfect risk-sharing contracts with bargaining. These contracts significantly improve consumption smoothing and welfare relative to self-insurance through savings. Incorporating savings decisions into the contract (asset contractibility) implies sizable gains for both the insurers and the insured. The size and distribution of these gains depend critically on the insurers’ market power. Finally, a rate of return advantage for insurers destroys surplus and is thus harmful to both contracting parties.

JEL Classification: D11, E21

Suggested Citation

Karaivanov, Alexander and Martin, Fernando M., Market Power and Asset Contractibility in Dynamic Insurance Contracts (2016). Review, Vol. 98, Issue 2, pp. 111-127, 2016. Available at SSRN: https://ssrn.com/abstract=2799144 or http://dx.doi.org/10.20955/r.2016.111-127

Alexander Karaivanov (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Fernando Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-7350 (Phone)

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