The Equivalence of Lending Equilibria and Signalling-Based Insurance under Asymmetric Information
AbstractI present a model in which a continuum of individuals have stochastic idiosyncratic income shocks. Complete insurance is physically feasible but unattainable due to an information asymmetry; income shocks are observable only by the individuals receiving them. Any insurance institution must therefore rely on self-repoorting of income innovations. Two ways of achieving incentive-compatible self-reporting are presented. The first is a debt market with an explicit lending restriction. The second is an insurance contract that linearly filters a signal transmitted by individuals. The two are then demonstrated to be identical. Equilibrium consumption fluctuates in a random walk, which is inefficient given the physical potential for complete insurance, but is efficient given the information constraints. The results are complementary to those of Green (1987) but permit more general stochastic processes of income to be analyzed. Serial correlation of income reduces the efficiency of the insurance.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 21 (1990)
Issue (Month): 3 (Autumn)
Contact details of provider:
Web page: http://www.rje.org
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.