Abstract
In liability lawsuits (eg product liability or patent infringement), a third party demands compensation from a firm. Verifying that the firm harmed the third party requires a costly lawsuit, so parties often negotiate a settlement agreement. Liability insurance improves the firm’s bargaining leverage when negotiating this settlement. We study this leverage effect of insurance and characterize equilibrium contracts under symmetric and asymmetric information: in a competitive market, only a pooling equilibrium with under-insurance may exist; in a monopolistic setting, the insurer offers at most two contracts which under-insure low-risk types and may inefficiently induce high-risk types to litigate.
Lemus, Jorge and Temnyalov, Emil and Turner, John L, Liability Insurance: Equilibrium Contracts under Monopoly and Competition (August 20, 2018).
First posted 2018-11-26 06:47:29
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