La Crema: A Case Study of Mutual Fire Insurance

Posted: 26 May 2003

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)

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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-efficient 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 in which 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 the nondegenerate equilibria of the mechanism are nearly truthful and approximately Pareto efficient.

Suggested Citation

Cabrales, Antonio and Calvo-Armengol, Antoni and Jackson, Matthew O., La Crema: A Case Study of Mutual Fire Insurance. Journal of Political Economy, Vol. 111, April 2003. Available at SSRN: https://ssrn.com/abstract=384222

Antonio Cabrales

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 (Contact Author)

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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