Pareto efficient insurance contracts when the insurer's cost function is discontinuous

Dana, Rose-Anne; Carlier, Guillaume

Dana, Rose-Anne; Carlier, Guillaume (2003), Pareto efficient insurance contracts when the insurer's cost function is discontinuous, Economic Theory, 21, 4, p. 871-893. http://dx.doi.org/10.1007/s00199-002-0281-z

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Type

Article accepté pour publication ou publié

Date

2003

Journal name

Economic Theory

Volume

Number

Publisher

Springer

Pages

871-893

Abstract (EN)

We consider the problem of efficient insurance contracts when the cost structure includes a fixed cost per claim. We prove existence of efficient insurance contracts and that the indemnity function in such contracts is non-decreasing in the damage. We further show that either there is no insurance, or the indemnity is positive for all losses, or efficient insurance contracts have a unique jump. We study variants of the model and provide a generalization to the case of non expected utilities. Our results are then applied to Townsend's model of deterministic auditing.

Subjects / Keywords

Discontinuous cost function; Auditing; Efficient insurance contracts

JEL

G22 - Insurance; Insurance Companies; Actuarial Studies
C61 - Optimization Techniques; Programming Models; Dynamic Analysis