Economics Department

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TITLE:
Latent Policies: An Extended Example

AUTHOR(S):
Richard Arnott, Boston College
Chong-en Bai, Boston College
Brian Sack , Massachusetts Institute of Technology

DOCUMENT TYPE: Article

ABSTRACT:
Arnott and Stiglitz (1993) have argued that, in competitive insurance markets with moral hazard, equilibrium may entail firms offering latent policies--policies that are not bought in equilibrium but are kept in place to deter entry. This paper provides an extended example of such an equilibrium, which not only proces that latent policies can be present in equilibrium but also elucidates the mechanism which makes them potentially effective in deterring entry.