Summary.
We consider the problem of efficient insurance contracts when the cost structure includes a fixed cost per claim. We prove existence of efficient insurance contracts and that the indemnity function in such contracts is non-decreasing in the damage. We further show that either there is no insurance, or the indemnity is positive for all losses, or efficient insurance contracts have a unique jump. We study variants of the model and provide a generalization to the case of non expected utilities. Our results are then applied to Townsend's model of deterministic auditing.
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Received: November 8, 2000; revised version: March 12, 2002
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ID="*" We are grateful to F. Salanié for pointing out an error in the previous version of the paper and for suggesting Proposition 6 to us.
Correspondence to: R.-A. Dana
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Carlier, G., Dana, RA. Pareto efficient insurance contracts when the insurer's cost function is discontinuous. Econ Theory 21, 871–893 (2003). https://doi.org/10.1007/s00199-002-0281-z
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DOI: https://doi.org/10.1007/s00199-002-0281-z