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Randomization with Asymmetric Information

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  • Richard Arnott
  • Joseph E. Stiglitz

Abstract

It is by now well known that, in the presence of moral hazard or adverse selection, randomization of insurance premiums and benefits may be Pareto efficient. This article provides a typology of the various forms that randomization may take, derives necessary or sufficient conditions for the desirability of these various forms of randomization, obtains some single characterization theorems of the efficient random policies, gives some intuition behind the results, and considers why randomization appears to occur less often in practice than the theory suggests it should.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 19 (1988)
Issue (Month): 3 (Autumn)
Pages: 344-362

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Handle: RePEc:rje:randje:v:19:y:1988:i:autumn:p:344-362

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  1. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  2. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 630-49, November.
  3. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 1(1), pages 121-54, Summer.
  4. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, Elsevier, vol. 2(3), pages 225-243, September.
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