Liability Insurance: Equilibrium Contracts under Monopoly and Competition

In liability lawsuits (e.g., patent infringement), a plaintiff demands compensation from defendant, and the parties often negotiate settlement to avoid costly trial. Liability insurance creates bargaining leverage for defendant in this negotiation. We study characteristics of monopoly equilibrium contracts settings where effect is substantial source value insurance. Our results show that under adverse selection, monopolist offers at most two contracts, which underinsure low-risk types may inefficiently induce high-risk litigate. competitive market, only pooling with underinsurance exist. (JEL D41, D42, D82, D86, G22, K13, K41)