INSURANCE MONOPOLY AND RENEGOTIATION

The mechanism design problem of a monopoly insurer - faced with privat ely informed insurees - is considered. It is assumed that the insurer cannot commit not to renegotiate (by using the information that custom er separation reveals) before contracts are put into force. A solution is offered by modeling renegotiation-proofness in a framework inspire d by Greenberg's theory of social situations. Maximizing profit within the set of renegotiation-proof outcomes always leads to a semi-separa ting outcome (i.e. neither full pooling nor full separation can occur) and may leave all low-risks as well as some of the high-risks self-in sured.