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Sharing aggregate risks under moral hazard

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  • Gabrielle Demange

    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

Abstract

This paper analyzes the efficient design of insurance schemes in the presence of aggregate shocks and moral hazard. The population is divided into groups, the labour force in different sectors for instance. In each group, individuals are ex ante identical but are subject to idiosyncratic shocks. Without moral hazard, optimality requires (1) full insurance against idiosyncratic shocks, which gives rise to a representative agent for each group and (2) optimal sharing of macro-economic risks between these representative agents. The paper investigates what remains of this analysis when the presence of moral hazard conflicts with the full insurance of idiosyncratic shocks. In particular, how is the sharing of macro-economic risks across groups affected by the partial insurance against idiosyncratic risks? The design of unemployment insurance schemes in different economic sectors, and the design of pension annuities in an unfunded social security system are two potential applications.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number halshs-00586739.

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Date of creation: May 2008
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Handle: RePEc:hal:psewpa:halshs-00586739

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Related research

Keywords: moral hazard ; insurance ; mutuality principle ; macro-economic risk;

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Cited by:
  1. Costa, Carlos Eugênio da & Luz, Vitor F., 2010. "The Private Memory of Aggregate Shocks," Economics Working Papers (Ensaios Economicos da EPGE) 706, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  2. Mohamed Belhaj & Renaud Bourlès & Frédéric Deroïan, 2010. "Moral hazard and risk-sharing: risk-taking as an incentive tool," Working Papers halshs-00512779, HAL.
  3. Florian Scheuer, 2013. "Optimal Asset Taxes in Financial Markets with Aggregate Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 405-420, July.

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