Randomization with Asymmetric Information
AbstractIt 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 InfoPaper provided by David K. Levine in its series Levine's Working Paper Archive with number 2054.
Date of creation: 08 Dec 2010
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- 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.
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- Stiglitz, Joseph E., 1982.
"Self-selection and Pareto efficient taxation,"
Journal of Public Economics, Elsevier,
Elsevier, vol. 17(2), pages 213-240, March.
- 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.
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