Competitive Insurance Markets with Limited Commitment
Simon Board*, Moritz Meyer-ter-Vehn
Date: 2012-05-05 10:45 am – 11:15 am
Last modified: 2012-04-17
Abstract
This paper characterizes the distribution of insurance contracts in a model where buyers can quit the contract at any time, undermining the benefits of long-term relationships. We first show that sellers offer stationary contracts, and that an optimal contract is characterized by a premium and a stop-loss. In equilibrium, contracts are distributed continuously, with some sellers offering lots of insurance for a high premium, and others offering little insurance for a low premium. Given free entry of sellers, all buyers receive some insurance, but those at the bottom of the distribution receive very little.