Nick Netzer () (Department of Economics, University of Konstanz) Florian Scheuer () (Department of Economics, Massachussetts Institute of Technology)
Abstract
We examine equilibria in the sense of Rothschild and Stiglitz (1976) in competitive insurance markets when individuals take unobservable labor supply decisions. Precautionary labor motives introduce countervailing incentives in the insurance market, and imperfect type separation can occur in the standard case in which individuals differ only in risk. We then extend the model to allow for both unobservable risks and labor productivities. Under these circumstances, both imperfect risk separation and genuine pooling of different risk-productivity types can arise. We show that such equilibria, with endogenous income heterogeneity, generally differ from those under exogenous income heterogeneity analyzed by Smart (2000) and Wambach (2000). We provide necessary and sufficient equilibrium existence conditions.
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Find related papers by JEL classification: G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
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