Liability Insurance: Equilibrium Contracts under Monopoly and Competition
- (pp. 83-115)
Abstract
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.Citation
Lemus, Jorge, Emil Temnyalov, and John L. Turner. 2021. "Liability Insurance: Equilibrium Contracts under Monopoly and Competition." American Economic Journal: Microeconomics, 13 (1): 83-115. DOI: 10.1257/mic.20180245Additional Materials
JEL Classification
- D41 Market Structure, Pricing, and Design: Perfect Competition
- D42 Market Structure, Pricing, and Design: Monopoly
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- G22 Insurance; Insurance Companies; Actuarial Studies
- K13 Tort Law and Product Liability; Forensic Economics
- K41 Litigation Process
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