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Non-exclusive dynamic contracts, competition, and the limits of insurance

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  • Ales, Laurence
  • Maziero, Pricila

Abstract

We study how the presence of non-exclusive contracts limits the amount of insurance provided in a decentralized economy. We consider a dynamic Mirrleesian economy in which agents are privately informed about idiosyncratic labor productivity shocks. Agents sign privately observable insurance contracts with multiple firms (i.e., they are non-exclusive). Contracts specify both labor and savings requirements. Firms have no restriction on the contracts they can offer and interact strategically. In equilibrium, contrary to the case with exclusive contracts, a standard Euler equation holds, and the marginal rate of substitution between consumption and leisure is equated to the worker's marginal productivity. Also, each agent receives zero net present value of transfers. These conditions imply the equilibrium allocation is equivalent to a standard incomplete markets model. To sustain this equilibrium, more than one firm must be active and must also offer latent contracts to deter deviations to more profitable contingent contracts. In this environment, the non-observability of contracts removes the possibility of additional insurance beyond self-insurance.

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  • Ales, Laurence & Maziero, Pricila, 2016. "Non-exclusive dynamic contracts, competition, and the limits of insurance," Journal of Economic Theory, Elsevier, vol. 166(C), pages 362-395.
    • Handle: RePEc:eee:jetheo:v:166:y:2016:i:c:p:362-395
    DOI: 10.1016/j.jet.2016.09.006
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    2. Carvajal, Andrés & Thereze, João, 2023. "Insurance contracts and financial markets," Mathematical Social Sciences, Elsevier, vol. 121(C), pages 8-19.
    3. Gwenaël Piaser, 2014. "Common Agency Games with Common Value Exclusion, Convexity and Existence," Working Papers 2014-420, Department of Research, Ipag Business School.
    4. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2014. "Multiple Contracting in Insurance Markets," TSE Working Papers 14-532, Toulouse School of Economics (TSE), revised Sep 2016.
    5. Giuseppe Bertola & Winfried Koeniger, 2015. "Hidden insurance in a moral-hazard economy," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 777-790, October.
    6. Augustin Landier & Guillaume Plantin, 2017. "Taxing the Rich," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(3), pages 1186-1209.
    7. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2014. "Consumption and Labor Supply with Partial Insurance: An Analytical Framework," American Economic Review, American Economic Association, vol. 104(7), pages 2075-2126, July.
    8. Golosov, M. & Tsyvinski, A. & Werquin, N., 2016. "Recursive Contracts and Endogenously Incomplete Markets," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 725-841, Elsevier.
    9. Vladimir Asriyan & Victoria Vanasco, 2019. "Security design in non-exclusive markets with asymmetric information," Economics Working Papers 1712, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2021.
    10. Mikhail Golosov & Maxim Troshkin & Aleh Tsyvinski, 2011. "Optimal Taxation: Merging Micro and Macro Approaches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 147-174, August.
    11. Laurence Ales, 2009. "Adverse Selection and Non-exclusive Contracts," 2009 Meeting Papers 854, Society for Economic Dynamics.
    12. Bertola, Giuseppe & Koeniger, Winfried, 2010. "Public and Private Insurance with Costly Transactions," CEPR Discussion Papers 8062, C.E.P.R. Discussion Papers.
    13. repec:hal:spmain:info:hdl:2441/3lf2qe5um58328r4d5r2rq9noc is not listed on IDEAS
    14. Panetti, Ettore, 2011. "Unobservable savings, risk sharing and default in the financial system," MPRA Paper 29542, University Library of Munich, Germany.
    15. Sarolta Laczo, 2010. "Estimating Dynamic Contracts: Risk Sharing in Village Economies," 2010 Meeting Papers 687, Society for Economic Dynamics.
    16. repec:hal:spmain:info:hdl:2441/6poqlonjhj8fdpldq7rs4pqcu9 is not listed on IDEAS

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    More about this item

    Keywords

    Optimal dynamic social insurance; Non-exclusive contracts; Incomplete markets; Optimal taxation; Private information;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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