TY  - JOUR
AU  - Arnott,Richard J.
AU  - Stiglitz,Joseph E.
TI  - Dysfunctional Non-Market Institutions and the Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2666
PY  - 1988
Y2  - July 1988
UR  - http://www.nber.org/papers/w2666
L1  - http://www.nber.org/papers/w2666.pdf
N1  - Author contact info:
Richard J. Arnott
Department of Economics
Boston College
Chestnut Hill, MA 02467
Tel: 617/552-3674
Fax: 617/552-2308
E-Mail: richard.arnott@ucr.edu

Joseph E. Stiglitz
Uris Hall, Columbia University
3022 Broadway, Room 814
New York, NY  10027
Tel: 212/854-0671
Fax: 212/662-8474
E-Mail: jes322@columbia.edu
AB  - There is a widespread belief that when significant market failure occurs, there are strong incentives for non-market institutions to develop which go at least part of the way to remedying the deficiency. We demonstrate that this functionalist position is not in general valid. In particular, we examine a situation where insurance is characterized by moral hazard. We show that when market insurance is provided, supplementary mutual assistance between family and friends (unobservable to market insurers) -- a form of non-market institution -- will occur and may be harmful. This example suggests that non-market institutions can arise spontaneously even though they are dysfunctional.
ER  -