Insurance design and arson-type risks
Theoretical Economics
2021-12-14 v1
Abstract
We design the insurance contract when the insurer faces arson-type risks. The optimal contract must be manipulation-proof. It is therefore continuous, it has a bounded slope, and it satisfies the no-sabotage condition when arson-type actions are free. Any contract that mixes a deductible, coinsurance and an upper limit is manipulation-proof. We also show that the ability to perform arson-type actions reduces the insured's welfare as less coverage is offered in equilibrium.
Cite
@article{arxiv.2112.06817,
title = {Insurance design and arson-type risks},
author = {Jean-Gabriel Lauzier},
journal= {arXiv preprint arXiv:2112.06817},
year = {2021}
}