Liability insurance: Equilibrium contracts under monopoly and competition
By: Lemus, J., temnyalov, E. and Turner, J.L
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BookPublisher: American Economic Journal: Microeconomics Description: 13(1), Feb, 2021: p.83-115.
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American Economic Journal: MicroeconomicsSummary: In liability lawsuits (e.g., patent infringement), a plaintiff demands compensation from a defendant, and the parties often negotiate a settlement to avoid a costly trial. Liability insurance creates bargaining leverage for the defendant in this settlement negotiation. We study the characteristics of monopoly and equilibrium contracts in settings where this leverage effect is a substantial source of value for insurance. Our results show that under adverse selection, a monopolist offers at most two contracts, which underinsure low-risk types and may inefficiently induce high-risk types to litigate. In a competitive market, only a pooling equilibrium with underinsurance may exist. – Reproduced
| Item type | Current location | Call number | Vol info | Status | Date due | Barcode |
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Articles
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Indian Institute of Public Administration | 13(1), Feb, 2021: p.83-115 | Available | AR125187 |
In liability lawsuits (e.g., patent infringement), a plaintiff demands compensation from a defendant, and the parties often negotiate a settlement to avoid a costly trial. Liability insurance creates bargaining leverage for the defendant in this settlement negotiation. We study the characteristics of monopoly and equilibrium contracts in settings where this leverage effect is a substantial source of value for insurance. Our results show that under adverse selection, a monopolist offers at most two contracts, which underinsure low-risk types and may inefficiently induce high-risk types to litigate. In a competitive market, only a pooling equilibrium with underinsurance may exist. – Reproduced
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