TY - JOUR
T1 - Liability Insurance
T2 - Equilibrium Contracts under Monopoly and Competition
AU - Lemus, Jorge
AU - Temnyalov, Emil
AU - Turner, John L.
N1 - Funding Information:
* Lemus: Department of Economics, University of Illinois Urbana-Champaign, 214 David Kinley Hall, 1407 W Gregory St, Urbana, IL 61801 (email: jalemus@illinois.edu); Temnyalov: Department of Economics, University Technology Sydney, PO Box 123, Sydney, NSW 2007, Australia (email: emil.temnyalov@uts.edu.au); Turner: Department of Economics, Terry College of Business, University of Georgia, Athens, GA 30602, (email: jlturner@ uga.edu). Michael Ostrovsky was coeditor for this article. We thank three anonymous referees for helpful comments. We also thank Dan Bernhardt, Yeon-Koo Che, In-Koo Cho, Simon Grant, Bruno Jullien, Stefan Krasa, Patrick Rey, Guillaume Roger, and Art Snow. We benefited from conversations with Jorge Gallardo-Garcia and other liability and litigation experts at Bates White as well as seminar audiences at IIOC, ESAM, EARIE, LACEA, APIOC, AETW, AMES, Clemson University, Monash University, UIUC, UNSW, Texas A&M, Cornell (Johnson), ZJU Conference on Industrial Economics, University of Louisville, and Iowa State University. Turner acknowledges research support from the Terry-Sanford research program and from the James C. Bonbright Center for the Study of Regulation.
Publisher Copyright:
© 2022
PY - 2021
Y1 - 2021
N2 - 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 monopoly and 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 underinsure low-risk types and may inefficiently induce high-risk types to litigate. In a competitive market, only a pooling equilibrium with underinsurance may exist. (JEL D41, D42, D82, D86, G22, K13, K41)
AB - 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 monopoly and 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 underinsure low-risk types and may inefficiently induce high-risk types to litigate. In a competitive market, only a pooling equilibrium with underinsurance may exist. (JEL D41, D42, D82, D86, G22, K13, K41)
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U2 - 10.1257/mic.20180245
DO - 10.1257/mic.20180245
M3 - Article
AN - SCOPUS:85126800435
SN - 1945-7669
VL - 13
SP - 83
EP - 115
JO - American Economic Journal: Microeconomics
JF - American Economic Journal: Microeconomics
IS - 1
ER -