Designing insurance markets with moral hazard and nonexclusive contracts

Abstract We design competitive markets in large insurance economies with moral hazard, under the additional constraint that contracts may be nonexclusive. In particular, we consider the situation where contracts are verifiable and enforceable within a local market, but globally, i.e., across markets, they are not. Agents can buy (or sell) insurance contracts in multiple markets subject to a (global) budget constraint. Because of local exclusivity, at equilibrium firms make zero profits. Although equilibria are indeterminate, the incentive efficient contract may not be an equilibrium. However, with a Wilsonian or a forward induction refinement, we show that equilibrium is ‘third best’ efficient.