La Crema: A case study of mutual fire insurance

Antonio Cabrales, Antoni Calvó-Armengol, Matthew O. Jackson

Research output: Contribution to journalArticleResearchpeer-review

17 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)425-458
JournalJournal of Political Economy
Volume111
DOIs
Publication statusPublished - 1 Apr 2003

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