Nobody downloaded yet

# Insurance Model: Competitive Contracts - Essay Example

Comments (0) Cite this document
Summary
We consider a model with a large number of firms and a large number of rational risk-averse consumers with standard preferences. The consumers have an initial wealth W and there is a possibility of an accident that causes damage D. We shall set up the insurance model as one of trade where the firm offers the consumers state contingent claims in return for their initial endowments…
Read TextPreview

## Extract of sample "Insurance Model: Competitive Contracts"

Download file to see previous pages The consumers have standard preferences defined over consumption. If P is the probability of the loss, then the consumers expected utility is: Thus, we can have the following indifference curve: It is simple to show that this leads to negatively sloped convex indifference curves. The slope of the indifference curves are: The high risk and low risk groups differ in their probabilities of incurring the loss. The probability of accident of an individual consumer belonging to the high risk group is PH and that of one belonging to the low risk group is PL, where PH> PL. Figure 1 below shows the indifference curves for a particular utility level for representative agents from the two groups. Observe that since PH> PL the indifference curves for the high risk type will have flatter slopes (less negative). Figure 1: Indifference curves for the high risk and the low risk consumers The competitive firms The representative competitive firm’s objective is to maximize its expected profits or alternatively minimize its expected costs by trading with the consumer. Each firm offers a pair of contingent claims (G,B) which realize in the good (No loss) and bad (loss) states in return for the consumers initial endowment. If P is the probability of a claim, then the expected costs of the firm are equal to: We can form the Iso-cost function for the monopolist as follows: Evidently, these are straight lines with a slope of . Observe that since PH> PL the Iso-cost line for the high risk type will have a flatter slope (less negative). Thus, the iso-cost lines for the High risk type and the low risk type can be drawn as follows: Figure 2: The iso-cost lines for the monopolist insurer for high risk and low risk contracts – C(H) represents the iso cost line for the high risk types and C(L) represents the isocost line for the low risk type. Competitive equilibrium A crucial point to note is that because the market is competitive, the firm can make only zero profits in equilibrium. Therefore, the equilibrium contract will ensure that the cost is equal to the value of the consumer’s endowment such that revenue equals cost. We start off by considering the possibility of pooled and separating equilibriums under asymmetric information. Competitive pooling equilibrium under asymmetric information Recall that asymmetric information is a situation where one or some of the players of the game have private information. In the present context the asymmetric information is manifested in the form of consumers having private information since they know whether they belong to high risk or low risk groups. The firm does not know any particular agents type. However, the firms are perfectly aware of the exact probability distribution of consumer types. A pooling contract will offer the same good state bad state consumption claims to both types of consumers. That is, a single contract will be available for both types. There are three participation constraints that must be satisfied, two for either type of consumers and one for the firm. The participation constraint requires that the contract offered by the firm provides him at least as much expected utility as the consumer’s initial endowment. This implies that for any consumer to accept the firms offer, the contract has to lie on or above the indifference curve through the initial endowment ...Download file to see next pagesRead More
Cite this document
• APA
• MLA
• CHICAGO
(“Insurance Model: Competitive Contracts Essay Example | Topics and Well Written Essays - 1000 words”, n.d.)
Retrieved from https://studentshare.org/environmental-studies/1422703-insurance-model-competitive-contracts
(Insurance Model: Competitive Contracts Essay Example | Topics and Well Written Essays - 1000 Words)
https://studentshare.org/environmental-studies/1422703-insurance-model-competitive-contracts.
“Insurance Model: Competitive Contracts Essay Example | Topics and Well Written Essays - 1000 Words”, n.d. https://studentshare.org/environmental-studies/1422703-insurance-model-competitive-contracts.
Comments (0)
Click to create a comment or rate a document

## CHECK THESE SAMPLES OF Insurance Model: Competitive Contracts

### Contracts

...? Contracts work 10/20 Executive Summary The recommendation described below reflects the assessment of this based on the provisionsindicated by the NEC3-ECC contract frame work. I shall describe an alternative framework that may provide more understanding and coverage as far as ensuring project completion. The combination of the two frameworks shall be the recommended convergence of two frameworks designed at completing projects. AOS Development is a national housing development company in Edinburgh and has embarked on eighty housing units developments in Skye, Scotland. The consultant’s documents were submitted on time, planning permissions gained and quotes received from various contractors. The project...
12 Pages(3000 words)Coursework

### Insurance Model

...?We consider a model with a single firm and a large number of rational risk-averse consumers with standard preferences. The consumers have an initialwealth W and there is a possibility of an accident that causes damage D. We shall set up the insurance model as one of trade where the firm offers the consumers state contingent claims in return for their initial endowments. Consumers The consumers can be of two types, namely high risk (H) and low risk (L). These two groups of consumers have the same initial endowments e, which essentially are state contingent claims to consumption. These consumers are susceptible to an accidental loss in future. The consumers have standard preferences defined over consumption. If P is the probability... lines...
4 Pages(1000 words)Essay

### Porters Model of National Competitive Advantage

...﻿Porter’s Model of National Competitive Advantage Introduction: Micheal Porter- A Harvard’s professor, his model of national competitive advantage is one of the highest acclaimed works in the world which answers many questions about the economics and managerial sciences. He presented this model in his book ‘The Competitive Advantage of Nations’ in 1990 in which he discussed the reasons why some nations, social groups and economic institutions advances than others. His work focused on the collective competitive advantages of the firms in the nation rather than the performance of the individual firms. The orientation of his...
11 Pages(2750 words)Essay

### Porter's Model of National Competitive Advantage

...? Porter’s model of national competitive advantage What are the strengths and limitations of Porter’s model of national competitive advantage in explaining the comparative nature and achievements of national business systems? Introduction A number of classical theories in international trade suggest that the element of comparative advantage dwells in the feature endowments that a nation may be lucky enough to come by. These factor endowments may include features such as land, labor, natural resources, as well as, the magnitude of the local populace. In his model, Michael E. Porter makes an argument that a nation can fashion new highly developed factor endowments such as a strong technology, skilled labor, knowledge base, culture... ...
10 Pages(2500 words)Essay

### Porter's model of national competitive

...Porter’s Model of National Competitiveness Countries participate in the global economy, and have to compete in the toughworld market place to maintain their living standards. High productivity and product quality are important factors in maintaining a nation’s competitiveness. The World Economic Forum ranks countries in terms of their international competitiveness in the world market. Porter’s diamond model extends firm competitiveness to country competitiveness. This has opened up debate among economists and scholars based on the management theories. Governments team up with business institutions to device strategies...
9 Pages(2250 words)Essay

### Law Of International Insurance contracts

...An Essay Discussing How the Courts In the United s and in the United Kingdom view and define the word “accident” in relation to Article 17 Warsaw Convention I. Introduction Insurance protects the individual or entity from devastating loses which can occur through accidents and other relatively uncommon yet events devastating events (Gollier, 2003). To be insurable, the risk insured must meet certain criteria including the nature of the incident and the damage suffered, the time, place and cause of the incident, severity of the damage caused and the laws define the terms and conditions of the contract of insurance between the parties (Gollier, 2003). In...
10 Pages(2500 words)Essay

### Contracts

...Essentials of a Valid Contract of Essentials of a Valid Contract The determination as to whether a contractual agreement exists between any two parties to an agreement, six salient requirements must be fulfilled. The establishment of a contractual relationship begins with the offeror manifesting his/her willingness to fulfill the desired promise under specified terms and conditions. Following the offer, the offeree must either in express or implied terms accept to enter into the agreement to fulfill he/her part of the bargain under the terms and conditions specified. Parties must be of sound mind and of legal age make legally binding decisions. Minors or persons with unsound mind lack the capacity to...
1 Pages(250 words)Essay

### Contracts

...Insert Wood v. Lucy, Lady Duff-Gordon (1917) Facts Lucy Lady Duff-Gordon was a popular public figure who attached her togoods in order to improve sales in return for compensation. She hired Mr. Wood to assist her and allegedly forfeited the exclusive rights of issuing licenses out to third parties to her new agent under an arrangement that would entitle her to half of the returns obtained therefrom. Mr. Wood sued her for the breach of contract following her direct participation in the same business, now alone and without sharing the proceeds with Mr. Wood (Smith 29). Issue The court was to determine whether Ms Duff-Gordon was in breach of the earlier contract. Decision The lower appellate court...
2 Pages(500 words)Assignment

### Contracts

...whereby an individual is not allowed to divulge certain information to the public or any other third party without consent. This ensures that individuals are not able to reveal the trade secrets that they may come across during their participation in a certain activity related to the matter. Insurance Policy – This is also a common type of contract that is essential to any business organization and serves as a backup plan in case of any unforeseen tragedies that may take a financial toll on the company(McKendrick Pg65). The insurance policy is an agreement that keeps one safe from any potential dangers to the business and states the terms under which one is able to collect...
2 Pages(500 words)Essay

### Porters Model of National Competitive Advantage

...Porters Model of National Competitive Advantage Introduction A number of studies conducted for the last ten years reveal that outsourcing of information technology permits the companies to decrease their high expenses and boost their productivity (Lall, 2003). Through information technology, the firms are in a position to enjoy the flexibility and as a result enhancing the business performance. USA, China, UK, Japan, and Germany are all experiencing information technology outsourcing growth. IT outsourcing has been around for some time and is significantly affecting these countries’ and the world economy at large (Kearney, 2007). However, it is true that outsourcing IT services offshore brings with it new...
11 Pages(2750 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

## Let us find you another Essay on topic Insurance Model: Competitive Contracts for FREE!

This Website is owned and operated by Studentshare Ltd (HE364715) , having its registered office at Aglantzias , 21, COMPLEX 21B, Floor 2, Flat/Office 1, Aglantzia , Cyprus.
Join us:
Contact Us