Paper #518

Title:

La Crema: A case study of mutual fire insurance

Authors:

Antonio Cabrales, Antoni Calvó and Matthew O. Jackson

Date:

December 2000

Abstract:

We analyze a mutual fire insurance mechanism used in Andorra, which is called La Crema in the local language. This mechanism relies on households' announced property values to determine how much a household is reimbursed in the case of a fire and how payments are apportioned among other households. The only Pareto eficient allocation reachable through the mechanism requires that all households honestly report the true value of their property. However, such honest reporting is not an equilibrium except in the extreme case where the property values are identical for all households. Nevertheless, as the size of the society becomes large, the benefits from deviating from truthful reporting vanish, and all of the non-degenerate equilibria of the mechanism are nearly truthful and approximately Pareto efficient.

Keywords:

Insurance, contract theory, mechanism design, truthful revelation

JEL codes:

A13, C72, D64, D80

Area of Research:

Microeconomics

Published in:

Journal of Political Economy, 111, (2003), pp. 425-458

Download the paper in PDF format