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Rights to retrade, free-riding and insurance requirement

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  • Park, Jaevin

Abstract

Jacklin (1987) shows that if ex-post retrading is allowed, the optimal risk-sharing contract in the Diamond–Dybvig (1983) model is unraveled because of the free-riding incentives. I construct a retrading model with a contract the offer of which depends on the proportion of insured agents, to find out in what circumstances the agents can be insured. A minimum insurance requirement can improve welfare upon the Autarky equilibrium by providing partial insurance.

Suggested Citation

  • Park, Jaevin, 2023. "Rights to retrade, free-riding and insurance requirement," Economics Letters, Elsevier, vol. 225(C).
    • Handle: RePEc:eee:ecolet:v:225:y:2023:i:c:s0165176523000897
    DOI: 10.1016/j.econlet.2023.111064
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    References listed on IDEAS

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    More about this item

    Keywords

    Side-trading; Liquidity insurance; Risk-sharing; Incomplete markets;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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