Bertrand Villeneuve

The Consequences for a Monopolistic Insurance Firm of Evaluating Risk Better than Customers: The Adverse Selection Hypothesis Reversed

This article models a situation in which a monopolistic insurer evaluates risk better than its customers. The resulting equilibrium allocations are compared to the consequences of the standard adverse selection hypothesis. On the positive side, they exhibit the property that low-risk people are better covered than higher-risk people. On the normative side, the article shows that there are two reasons for avoiding excessive risk classification: one is the classical destruction of insurance possibilities, and the other comes from the distrustful atmosphere generated by new asymmetric information.

Competition between insurers with superior information

We analyze markets where insurers are better informed about risk than consumers. We show that even competitive markets may result in insufficient information revelation and inefficient insurance coverage. This explains why certain risky consumers remain uninsured and why certain market segments are persistently profitable. We also show robustness to competition in menus or mechanisms. Our analysis of the “contrary of adverse selection” (competition between principals with common value and exclusivity) is suitable for other markets (lawyers, doctors, mechanics, etc.).

Some economics of seasonal gas storage

We propose a model of seasonal gas markets which is flexible enough to include supply and demand shocks while also considering exhaustibility. The relative performances of alternative policies based on price caps and associated measures or tariffs are discussed. We illustrate with structural estimates on US data how this theory can be used to give insights into the intertemporal incidence of policy instruments.

Gas storage and security of Supply

This paper analyzes the role of storage for economies facing the risk of a gas supply disruption. We characterize the optimal/competitive transitory dynamics (accumulation, drainage and target stock). We show that the lack of protection of property rights, e.g. antispeculation measures, is likely to discourage storage completely. Responsible policy involves a series of measures taken ex ante that limit market failure. We provide a general method to calculate the social value of a policy. Finally, the model is extended to encompass specific characteristics of the gas industry (injection and release costs, limited storage capacity) and the timing of the crisis (alert/disruption). ∗We are grateful to seminar participants at Athens, Bologna, EARIE, Milan, Paris, THOR for their valuable remarks. †Direction de la Recherche, 361 av Pres Wilson, 93210 Saint Denis; e-mail: corinne.chaton@gazdefrance.com. ‡Universite de Toulouse, 21 allee de Brienne, 31000 Toulouse; e-mail: creti@cict.fr. §Universite de Toulouse, 21 allee de Brienne, 31000 Toulouse; e-mail: bertrand.villeneuve@cict.fr.

Complementarity and Substituability in Multiple‐Risk Insurance Markets

We study imperfect competition between insurers in a multiple-risk environment. In the absence of asymmetric information, equilibria are efficient, and we determine the degrees of specialization under which the specialized insurers are able or unable to capture the surplus. We show in contrast that under adverse selection, specialization systematically prevents second-best efficiency. Concluding on the role of our notions of strategic complementarity/substitutability on the tradeoff between efficiency and fairness of the allocation, we give indications on the desirable structure of the insurance industry.

Hedging Pressure and Speculation in Commodity Markets

We propose a comprehensive equilibrium model to examine the interaction between the physical and the derivative markets of a commodity. The model comprises four types of traders: hedgers of future sales and hedgers of future purchases, both of which operate on all markets; speculators who operate only on the futures market; and spot traders. We provide the necessary and sufficient conditions on the fundamentals of this economy for a rational expectations equilibrium to exist, and we show that it is unique. The model exhibits a remarkable variety of behaviors at equilibrium that we can use to analyze price relations in any market according to the characteristics of the commodity under consideration. Further, through a comparative statics analysis, we are able to precisely identify the losers and winners in the financialization of the commodity markets. Therefore, this paper clarifies the political economy of regulatory issues like speculators’ influence on prices.

Compensation for What? An Analysis of Insurance Strategies for Repairable Assets

We define a repairable asset as an irreplaceable commodity whose quality is at risk, but can be partly restored at a cost. Examples are houses, automobiles and, especially, health, for which standard monetary approaches are oversimplified. To optimize the value of insurance, the insurer and the insured have to agree upon repair strategies (when to fix the asset and how much) and compensation rules (how much money to receive for other goods). We clarify the role of the consumers preferences in the properties of the contract, and we highlight the relationship between repair strategies and the super- or submodular structure of the repair technology.

Strategic Capacity Investment Under Hold-Up Threats: The Role of Contract Length and Width

We analyze the impact of the length of incomplete contracts on investment and surplus sharing. In the bilateral relationship explored, the seller controls the input and the buyer invests. With two-part tariffs, the length of the contract is irrelevant: the surplus is maximal and goes to the seller. In linear contracts, the seller prefers the shortest contract and the buyer the longest one. Further, the commitment period concentrates the incentives, whereas afterwards there is rent extraction. The socially efficient contract is as short as possible; yet, long contracts can be promoted because of the surplus they allocate to the buyer.

Mortgage life insurance: a rationale for a time limit in switching rights

I examine competition in the sector of mortgage life insurance, in particular the periodic switching right (PSR), by which the borrower can change his insurer once every period (say, every year). The PSR is likely to have pro competitive effects (lower premium), but by the same move, to lead to excessive segmentation. The main theoretical prediction of the PSR is that, in equilibrium, everyone will pay every year a premium reflecting his current risk, meaning that the risk of future risk evolution is not covered. This destruction of insurance is appreciated negatively by consumers. The trade-off is between, on the one hand, a lower price for insurance, and on the other hand, a lower quality of insurance. I simulate the cost of the PSR and find about 5–15 % of the total insurance cost. This order of magnitude is slightly smaller than the benefit one can expect from increased competition. All in all, a switching right limited in time would bring the benefits of competition and avoid most of the cost of segmentation.

Negotiated Red Zones Around Hazardous Plants

Urbanization in exposed areas increases the cost of disasters. For industrial risks, potential victims raise firms’ liabilities. For natural risks, overexposure by some undermines mutualization. Land use policy (particularly exclusion zones) and insurance shape urbanization, but their efficiency is limited by hazard-map precision. Map-based discrimination being politically sensitive, we identify an operation of map redrawing that increases the welfare of all. Climate change and population growth increase risk. We exhibit realistic cases where exclusion zones shrink as risk rises. We disentangle the competing effects at play. Results are established for alternative distributions of bargaining power between households, mayor and firm.The industrialists are liable for any damage they cause to neighboring households. Consequently, households do not have to pay for the risk they create by locating in exposed areas. A common and efficient self-insurance strategy for the firm is to freeze land, or to negotiate land-use restrictions. When people understand only simple messages about risk, the boundaries of the building zone are the ground for negotiation with the mayor. Typical scenarios regarding the distribution of bargaining power between the firm and the mayor are examined. In the comparative statics, we show how red zones are revised as technology or demography change. Further, we give the conditions for a purple zone (limit red zone as the population grows) and a green zone (limit inhabitable zone as the risk grows) to exist.