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Repeated insurance relationships in a costly state verification model: with an application to deposit insurance

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Author Info
Bruce D. Smith
Cheng Wang

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Abstract

We consider the problem of an insurer who enters into a repeated relationship with a set of risk averse agents in the presence of ex post verification costs. The insurer wishes to minimize the expected cost of providing these agents a certain expected utility level. We characterize the optimal contract between the insurer and the insured agents. We then apply the analysis to the provision of deposit insurance. Our results suggest - in a deposit insurance context - that it may be optimal to utilize the discount window early on, and to make deposit insurance payments only later, or not at all.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 574.

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Date of creation: 1997
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Handle: RePEc:fip:fedmwp:574

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Keywords: Insurance;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Townsend, Robert M., 1983. "Theories of intermediated structures," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 18(1), pages 221-272, January. [Downloadable!] (restricted)
  2. Boyd, John H & Smith, Bruce D, 1994. "How Good Are Standard Debt Contracts? Stochastic versus Nonstochastic Monitoring in a Costly State Verification Environment," Journal of Business, University of Chicago Press, vol. 67(4), pages 539-61, October. [Downloadable!] (restricted)
  3. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Blackwell Publishing, vol. 54(4), pages 599-617, October. [Downloadable!] (restricted)
  4. Stephen D. Williamson, 1995. "Discount Window Lending and Deposit Insurance," Macroeconomics 9504001, EconWPA, revised 18 Apr 1995. [Downloadable!]
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  5. Townsend, Robert M, 1982. "Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1166-86, December. [Downloadable!] (restricted)
  6. Townsend, Robert M., 1988. "Information constrained insurance : The revelation principle extended," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 411-450. [Downloadable!] (restricted)
  7. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Blackwell Publishing, vol. 59(3), pages 427-53, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Narayana R. Kocherlakota, 2000. "Risky collateral and deposit insurance," Staff Report 274, Federal Reserve Bank of Minneapolis. [Downloadable!]
  2. Edward Simpson Prescott, 2004. "Auditing And Bank Capital Regulation," Working Papers wp2004_0412, CEMFI. [Downloadable!]
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  3. Cyril Monnet & Erwan Quintin, 2002. "Optimal contracts in a dynamic costly state verification model," Working Paper Series 126, European Central Bank. [Downloadable!]
    Other versions:
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