Title

Insurance Contracts Designed by Competitive Pooling

Document Type

Discussion Paper

Publication Date

8-1-2001

CFDP Number

1315

CFDP Pages

38

Abstract

We build a model of competitive pooling and show how insurance contracts emerge in equilibrium, designed by the invisible hand of perfect competition. When pools are exclusive, we obtain a unique separating equilibrium. When pools are not exclusive but seniority is recognized, we obtain a different unique equilibrium: the pivotal primary-secondary equilibrium. Here reliable and unreliable households take out a common primary insurance up to its maximum limit, and then unreliable households take out further secondary insurance.

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