Bargaining power and efficiency in insurance contracts Report as inadecuate

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Insurance contracts are frequently modelled as principal--agent relationships. Although it is commonly assumed that the principal, in this case the insurer, has complete freedom to design the contract, the problem formulation in much of the principal--agent literature presumes that the contract is constrained-Pareto-efficient. In the present paper, we consider the implications of a richer specification of the choices available to clients. In particular, we consider the entire spectrum of possible power differentials in the contracting relationship between insurers and clients. Our central result is that the agent can exploit information asymmetries to offset the bargaining power of the insurer, but that this process is socially costly.

Keywords: Principal-agent relationships ; insurance contracts ; power differentials

Subject(s): Institutional and Behavioral Economics

Research Methods/ Statistical Methods

Issue Date: Apr 01 2005

Publication Type: Working or Discussion Paper

PURL Identifier:

Total Pages: 21

JEL Codes: D82; G22

Series Statement: Risk and Uncertainty Program


Record appears in: University of Queensland > School of Economics > Risk and Sustainable Management Group Working Papers

Author: Quiggin, John ; Chambers, Robert G.



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