Arnott, Richard, Chong-en Bai, and Brian Sack. “Latent Policies”. Boston College Working Papers in Economics 353, 1996.
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.