Liability Insurance: Equilibrium Contracts under Monopoly and Competition

Lemus, J; Temnyalov, E; Turner, JL

Liability Insurance: Equilibrium Contracts under Monopoly and Competition

Lemus, J Temnyalov, E

Turner, JL

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Publisher:: American Economic Association
Publication Type:: Journal Article
Citation:: American Economic Journal: Microeconomics, 2021, 13, (1), pp. 83-115
Issue Date:: 2021-02-01

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Field	Value	Language
dc.contributor.author	Lemus, J
dc.contributor.author	Temnyalov, E https://orcid.org/0000-0002-1077-8196
dc.contributor.author	Turner, JL
dc.date.accessioned	2021-02-01T06:49:46Z
dc.date.available	2021-02-01T06:49:46Z
dc.date.issued	2021-02-01
dc.identifier.citation	American Economic Journal: Microeconomics, 2021, 13, (1), pp. 83-115
dc.identifier.issn	1945-7669
dc.identifier.issn	1945-7685
dc.identifier.uri	http://hdl.handle.net/10453/145702
dc.description.abstract	<jats:p> 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. (JEL D41, D42, D82, D86, G22, K13, K41) </jats:p>
dc.language	en
dc.publisher	American Economic Association
dc.relation.ispartof	American Economic Journal: Microeconomics
dc.relation.isbasedon	10.1257/mic.20180245
dc.rights	info:eu-repo/semantics/openAccess
dc.subject	14 Economics
dc.title	Liability Insurance: Equilibrium Contracts under Monopoly and Competition
dc.type	Journal Article
utslib.citation.volume	13
utslib.for	14 Economics
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Economics Discipline
pubs.organisational-group	/University of Technology Sydney
utslib.copyright.status	open_access	*
dc.date.updated	2021-02-01T06:49:41Z
pubs.issue	1
pubs.publication-status	Published
pubs.volume	13
utslib.citation.issue	1

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. (JEL D41, D42, D82, D86, G22, K13, K41)

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http://hdl.handle.net/10453/145702