Price Equilibrium, Efficiency, and Decentralizability in Insurance Markets

59 Pages Posted: 13 Nov 2007 Last revised: 31 Mar 2010

See all articles by Richard J. Arnott

Richard J. Arnott

Boston College; National Bureau of Economic Research (NBER)

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: March 1991

Abstract

In this paper, we investigate the descriptive and normative properties of competitive equilibrium with moral hazard when firms offer "price contracts" which allow clients to purchase as much insurance as they wish at the quoted prices. We show that a price equilibrium always exists and is one of three types: i) zero profit price equilibrium - zero profit, zero effort, full insurance ii) positive profit price equilibrium - positive profit, positive effort, partial insurance iii) zero insurance price equilibrium - zero insurance, zero profit, positive effort. We also demonstrate circumstances under which the linear taxation of price insurance allows decentralization of the social optimum (conditional on the unobservability of effort), and when it, does not, whether it is at least utility-improving.

Suggested Citation

Arnott, Richard J. and Stiglitz, Joseph E., Price Equilibrium, Efficiency, and Decentralizability in Insurance Markets (March 1991). NBER Working Paper No. w3642. Available at SSRN: https://ssrn.com/abstract=471569

Richard J. Arnott (Contact Author)

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Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

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