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Sovereign Insurance and Program Design

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  • Miguel Messmacher
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    Abstract

    The design of the optimal sovereign insurance contract is analyzed when: the sovereign chooses the contract; effort is not contractible; shocks are of uncertain magnitude; the sovereign can save; and the sovereign can default. Under these conditions: i) an ex ante premium leads to higher coverage; ii) the premium increases with the sovereign''s incentive to take risks; iii) a deductible is chosen to limit moral hazard; iv) the deductible-to-support ratio is decreasing with the size of the realized shock; and v) the change in the choice of savings when insurance is available is ambiguous, as there is a trade-off between inducing higher effort and increasing the likelihood of default.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/64.

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    Length: 30
    Date of creation: 01 Mar 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/64

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    Related research

    Keywords: Moral hazard; IMF; Fund; Financial risk; deposit insurance; international financial architecture; financial system; international finance; unemployment insurance; international financial system; financial institutions; international financial markets; risk aversion; insurance contracts; financial markets; coinsurance; emerging markets; financial stability; bonds; discount rate; international reserves; stock returns; sovereign bonds; financial liberalization; financial structure;

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