TY  - JOUR
AU  - Arnott,Richard
AU  - Stiglitz,Joseph E.
TI  - Price Equilibrium, Efficiency, and Decentralizability in Insurance Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3642
PY  - 1991
Y2  - March 1991
UR  - http://www.nber.org/papers/w3642
L1  - http://www.nber.org/papers/w3642.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 212
New York, NY  10027
Tel: 212/854-0671
Fax: 212/662-8474
E-Mail: jes322@columbia.edu
AB  - In this paper, we investigate the descriptive and normative properties of competitive equilibrium with moral hazard when firms offer "price contracts" which allow clients to purchase as much insurance as they wish at the quoted prices. We show that a price equilibrium always exists and is one of three types: i) zero profit price equilibrium - zero profit, zero effort, full insurance ii) positive profit price equilibrium - positive profit, positive effort, partial insurance iii) zero insurance price equilibrium - zero insurance, zero profit, positive effort. We also demonstrate circumstances under which the linear taxation of price insurance allows decentralization of the social optimum (conditional on the unobservability of effort), and when it, does not, whether it is at least utility-improving.
ER  -