Thus, it is feasible that a federal program explicitly aimed at alleviating the bankruptcy constraint faced by the private sector in high layers of disaster risk would improve the market equilibrium in the insurance sector by helping to complete the upper end of the disaster insurance market.
The preceding discussion manifests the advantages of creating an "efficient" mechanism for diversifying upper layers of disaster risk intertemporally - where, in this context, an "efficient" mechanism is one that does not distort the existing private market equilibrium by mispricing the risk absorbed through the contract.
In a market equilibrium, however, the primary insurer cannot defect as long as all reinsurance companies in the market punish a defecting primary insurance company by refusing to write reinsurance under the terms of an implicit long-term contract.
Firstly, we will take a look at the short-run where market equilibrium is achieved in both regions.
The market equilibrium of the Southern and Northern goods, Equations (6) and (7), could be as follows because income transfer from the Southern profit income to a Northern one is done.
Let's start with the short run analysis where the market equilibrium is achieved in both regions.