Liability Insurance: Equilibrium Contracts under Monopoly and Competition

Jorge Lemus, Emil Temnyalov, John L. Turner

Research output: Working paper


In liability lawsuits (e.g. patent infringement) a plaintiff demands compensation from a defendant and the parties often negotiate a settlement to avoid a costly trial. Liability insurance creates bargaining leverage for the defendant in this settlement negotiation. We study the characteristics of equilibrium contracts in settings where this leverage effect is a substantial source of value for insurance. Our results show that under adverse selection, a monopolist offers at most two contracts, which under-insure low-risk types and may inefficiently induce high-risk types to litigate. In a competitive market, only a pooling equilibrium with under-insurance may exist.<br>
Original languageEnglish (US)
Number of pages82
StatePublished - Nov 26 2018


  • bargaining
  • adverse selection
  • liability
  • litigation
  • insurance
  • competitive equilibrium
  • monopoly


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