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Equilibrium in Competitive Insurance Markets: The Welfare Economics of Moral Hazard

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  • Richard Arnott
  • Joseph Stiglitz

Abstract

This paper examines the existence and properties of competitive equilibrium in economies with moral hazard. The nature of competitive equilibrium depends on whether insurers can observe an insured's total purchases of insurance. If insurers can observe this, an individual will purchase all his insurance from a single agent, and the contract will specify the price but also ration the quantity. If insurers cannot observe this, then a competitive equilibrium may not exist. Equilibrium may be characterized by random insurance.

Suggested Citation

  • Richard Arnott & Joseph Stiglitz, 1982. "Equilibrium in Competitive Insurance Markets: The Welfare Economics of Moral Hazard," Working Paper 483, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:483
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    Cited by:

    1. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435, National Bureau of Economic Research, Inc.
    2. Arnott, Richard, 1987. "Essai sur le risque moral," L'Actualité Economique, Société Canadienne de Science Economique, vol. 63(2), pages 74-97, juin et s.
    3. Hadi Dowlatabadi, 2007. "On integration of policies for climate and global change," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 12(5), pages 651-663, June.

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