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Hidden Insurance in a Moral Hazard Economy

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  • Bertola, Giuseppe

    ()
    (EDHEC Business School)

  • Koeniger, Winfried

    ()
    (University of St. Gallen)

Abstract

We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional form restrictions ensure that individual objective functions are optimized by an effort and insurance combination that is unique and satisfies first- and second-order conditions. Modeling insurance incompleteness in terms of costly production of private insurance services, we characterize the constrained inefficiency arising in general equilibrium from competitive pricing of nonexclusive financial contracts.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7806.

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Length: 32 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7806

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Keywords: hidden action; principal agent; first-order approach; constrained efficiency;

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  1. Laurence Ales & Pricila Maziero, . "Non-exclusive Dynamic Contracts, Competition, and the Limits of Insurance," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2010-E59, Carnegie Mellon University, Tepper School of Business.
  2. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 88(1), pages 44-62, February.
  3. Dirk Krueger & Fabrizio Perri, 2009. "Public versus Private Risk Sharing," NBER Working Papers 15582, National Bureau of Economic Research, Inc.
  4. Richard Arnott & Joseph Stiglitz, 1982. "Moral Hazard and Optimal Commodity Taxation," Working Papers, Queen's University, Department of Economics 500, Queen's University, Department of Economics.
  5. Harold L Cole & Narayana Kocherlakota, 2010. "Efficient Allocations with Hidden Income and Hidden Storage," Levine's Working Paper Archive 1909, David K. Levine.
  6. Bisin, Alberto & Gottardi, Piero, 1999. "Competitive Equilibria with Asymmetric Information," Journal of Economic Theory, Elsevier, Elsevier, vol. 87(1), pages 1-48, July.
  7. Tsyvinski, A. & Golosov, M., 2004. "Optimal Taxation with Endogenous Insurance Markets," 2004 Meeting Papers 124, Society for Economic Dynamics.
  8. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(2), pages 229-64, May.
  9. Alberto Bisin & John Geanakoplos & Piero Gottardi & Enrico Minelli & Heracles Polemarchakis, 2009. "Markets and Contracts," Working Papers, University of Brescia, Department of Economics 0915, University of Brescia, Department of Economics.
  10. Sebastian Koehne & Nicola Pavoni & Arpad Abraham, 2010. "On the First-Order Approach in Principal-Agent Models with Hidden Borrowing and Lending," 2010 Meeting Papers, Society for Economic Dynamics 947, Society for Economic Dynamics.
  11. Alberto Bisin & Danilo Guaitoli, 2004. "Moral Hazard and Nonexclusive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 306-328, Summer.
  12. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, Elsevier, vol. 10(1), pages 8-23, February.
  13. Raj Chetty & Emmanuel Saez, 2008. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," NBER Working Papers 14403, National Bureau of Economic Research, Inc.
  14. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(1), pages 41-61, February.
  15. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  16. Árpád Ábrahám & Nicola Pavoni, 2005. "The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(2-3), pages 370-381, 04/05.
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