La Crema: A case study of mutual fire insurance
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-efficient 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 in which 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 the nondegenerate equilibria of the mechanism are nearly truthful and approximately Pareto efficient.
Additional Information
© 2003 by The University of Chicago. We are grateful to Francisco Alcalá, Luis Corchón, Ashok Rai, Massimo Motta, Rafael Repullo, Joel Sobel, and the seminar participants at the European Winter Workshop of the Econometric Society and the University of California, Irvine Development Economics Conference for their comments. We thank Pierre‐André Chiappori and an anonymous referee for helpful suggestions. We also gratefully acknowledge the financial support of Spain's Ministry of Education under grants BEC2000‐1029 and SEC2001‐0973, the Generalitat de Catalunya under grant 1999SGR‐00157, and the National Science Foundation under grant SES‐9986190. Finally, special thanks to Benito Marquet Armengol, Cal Ton de Borró, for help with details regarding the history and operation of La Crema and for access to the data. This paper was written while Calvó‐Armengol was at Universidad Carlos III.Files
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Additional details
- Eprint ID
- 9570
- Resolver ID
- CaltechAUTHORS:CABjpe03
- Created
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2008-02-05Created from EPrint's datestamp field
- Updated
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2021-11-08Created from EPrint's last_modified field