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Failure of the first-order approach in an insurance problem with no commitment and hidden savings

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  • Wataru Nozawa

    (Kyushu University)

Abstract

Efficient insurance contracts in environments with various frictions have been characterized in the literature (see, for example, Thomas and Worrall (1988)). In some environments, the first-order approach suggested by Rogerson (1985) is useful in their characterization. This paper shows that the first-order approach is not valid in an environment with one-sided no commitment and hidden savings under the assumption that the utility function is CRRA or CARA and the return on savings is equal to the inverse of the agent's discount factor. The result complements the numerical result by à brahám and Laczó (2014), which suggests that the first-order approach is valid when the return on savings is low.

Suggested Citation

  • Wataru Nozawa, 2016. "Failure of the first-order approach in an insurance problem with no commitment and hidden savings," Economics Bulletin, AccessEcon, vol. 36(4), pages 2422-2429.
    • Handle: RePEc:ebl:ecbull:eb-16-00250
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    References listed on IDEAS

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    Cited by:

    1. Árpád Ábrahám & Sarolta Laczó, 2018. "Efficient Risk Sharing with Limited Commitment and Storage," Review of Economic Studies, Oxford University Press, vol. 85(3), pages 1389-1424.

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    More about this item

    Keywords

    dynamic contract; risk sharing; default; first-order approach;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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