Insurance contracts and financial markets

We study the interaction between insurance and financial markets. Individuals who differ only in risk have access to insurance contracts offered by a monopolist and can also save through a competitive market. We show that an equilibrium always exists in that economy and identify an externality imposed on the insurer's decision by the endogeneity of prices in the financial market. We argue that, because of that externality and in contrast to the case of pure contract theory, equilibrium always exhibits under-insurance even for the riskiest agents in the economy and may even exhibit pooling. Importantly, the externality does not disrupt the single crossing property of the economy.

Duke Scholars

Author Joao Thereze Fuqua School of Business