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Liability Insurance: Equilibrium Contracts under Monopoly and Competition

Author

Listed:
  • Jorge Lemus

    (University of Illinois Urbana-Champaign)

  • Emil Temnyalov

    (University of Technology Sydney)

  • John L. Turner

    (University of Georgia)

Abstract

In liability lawsuits (e.g. product liability or patent infringement), a third party demands compensation from a firm. Verifying that the firm harmed the third party requires a costly lawsuit, so parties often negotiate a settlement agreement. Liability insurance improves the firm�s bargaining leverage when negotiating this settlement. We study this leverage effect of insurance and characterize equilibrium contracts under symmetric and asymmetric information: in a competitive market, only a pooling equilibrium with under-insurance may exist; in a monopolistic setting, the insurer offers at most two contracts which under-insure low-risk types and may inefficiently induce high-risk types to litigate.

Suggested Citation

  • Jorge Lemus & Emil Temnyalov & John L. Turner, 2019. "Liability Insurance: Equilibrium Contracts under Monopoly and Competition," Working Paper Series 2019/11, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:ecowps:2019/11
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    References listed on IDEAS

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    Cited by:

    1. Bernhard Ganglmair & Christian Helmers & Brian J Love, 2022. "The Effect of Patent Litigation Insurance: Theory and Evidence from NPEs [“Valuable Patents]," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 38(3), pages 741-773.
    2. Bessen, James & Neuhäusler, Peter & Turner, John L. & Williams, Jonathan, 2018. "Trends in private patent costs and rents for publicly-traded United States firms," International Review of Law and Economics, Elsevier, vol. 56(C), pages 53-69.

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    More about this item

    Keywords

    liability; insurance; litigation; bargaining; adverse selection; competitive equilibrium; monopoly;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K1 - Law and Economics - - Basic Areas of Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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