Equilibrium, Asymmetric Information And Incentive Mechanism

The development of insurance industry in China requires the creation and development of insurance theory. Insurance theory is of great significance in directing insurance policy and market development. Meanwhile it is very important in theory because the study of insurance market has enforced the development of economic theory.The thesis employs the general equilibrium theory, principal-agent theory, game theory and information economics to study the optimal risk bearing condition in complete competitive insurance market and the characteristics of equilibrium, the incentive mechanism of Pareto improvement under asymmetric information.Firstly, the thesis is based on the paradigm of General Equilibrium. Arrow and Debreu viewed insurance markets as a bundle of contingent goods and analyzed insurance by using GE theory. After free and complete exchange, the necessary and sufficient condition of equilibrium is that each one has the same rate of marginal substitution for every pairs of contingent commodity under the premises of symmetric information, zero exchange cost, complete and competitive market. This is the typical condition of Pareto optimal risk bearing and the two theorems of Welfare Economics sustain.According to the mutuality principle the final contingent wealth of everyone depends only on the aggregate wealth of the mutual and the insurance indemnities rely only upon the aggregate loss incurred by the mutual fund. At the optimum, specific risks diversified through the mutualization: the member's final wealth depends upon his/her initial wealth only through its impact on the aggregate outcome and a member's incremental sharing of the aggregate risk equals his/her proportion of the group risk tolerance. For small risks, it is an acceptable approximation to consider linear sharing rules, and the efficient sharing rules will not be linear for large risks.In theory, a globally efficient risk bearing arrangement in theeconomy can be achieved by a set of decentralized risk trading between pairs of persons. In an idealized world, insurance companies play the role of brokerage firms buying and selling risks to attain an efficient allocation of risks. And if an insurance company is willing to offer an insurance policy against loss desired by a buyer at a premium depending only on the policy's actuarial value, then the policy chosen by a risk-averting buyer will take the form of 100 percent coverage above a deductible minimum.Secondly, the first theorem of welfare economics fails and the optimal risk-sharing and optimal incentive level cannot be attained in insurance market because of the asymmetric information.Moral hazard arises in insurance market when the insured risk is influenced by decisions made by the insured individuals and the care and activity levels cannot be costlessly specified in the insurance contract and enforced by the insurer. One significant result achieved in the thesis is that the insured's effort will rise when the amount of insurance increases depending on the characteristics of utility —if an increase in the final contingent wealth substantially decrease the disutility of effort. However, with separable utility increases in insurance coverage never cause efforts to increase.After analyzing the peculiar shape of indifference curves and the feasibility set under assumptions of different effort levels, the author analyzed the existence and properties of competitive equilibrium. When insurance purchases are observable and utility is separable, competitive equilibrium will entail firms to offer exclusive contracts that prevent its customers from purchasing insurance from other firms. The equilibrium exclusive contract is characterized by the point of maximum utility on the zero profit locus, and entails quantity rationing at the equilibrium price.When only price insurance contracts are allowed, equilibrium occurs at the lowest point on the price-consumption line consistent with non-negative profit. The price equilibrium may be a zero profit price equilibrium which...