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Randomization with Asymmetric Information

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Richard J. Arnott
Joseph E. Stiglitz

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Abstract

It is by now well-known that, in the presence of moral hazard or adverse selection, randomization of insurance premia and benefits may be Pareto efficient. This paper: i) provides a typology of the various forms that randomization may take; ii) derives necessary and/or sufficient conditions for the desirability of these various forms of randomization; iii) obtains some simple characterization theorems of the efficient random policies; iv) gives some intuition behind the results; and v) considers why randomization appears to occur less often in practice than the theory suggests it should.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2507.

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Date of creation: Feb 1988
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Handle: RePEc:nbr:nberwo:2507

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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. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  2. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-54, Summer. [Downloadable!] (restricted)
  3. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March. [Downloadable!] (restricted)
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  4. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September. [Downloadable!] (restricted)
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(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. Bertrand Villeneuve, 2003. "Concurrence et antisélection multidimensionnelle en assurance," Annales d'Economie et de Statistique, ADRES, issue 69, pages 06, Janvier-M. [Downloadable!]
  2. Alberto Bennardo & Pierre-Andre Chiappori, 2003. "Bertrand and Walras Equilibria Under Moral Hazard," Levine's Working Paper Archive 618897000000000748, David K. Levine. [Downloadable!]
    Other versions:
  3. Imran Rasul & Silvia Sonderegger, 2008. "The Role of the Agent's Outside Options in Principal-Agent Relationships," Bristol Economics Discussion Papers 08/605, Department of Economics, University of Bristol, UK. [Downloadable!]
  4. Bel? Jerez, 2000. "General Equilibrium with Asymmetric Information: a Dual Approach," UFAE and IAE Working Papers 510.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  5. Dagobert L. Brito & Jonathan H. Hamilton & Steven M. Slutsky & Joseph E. Stiglitz, 1991. "Dynamic Optimal Income Taxation with Government Commitment," NBER Working Papers 3265, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Alma Cohen & Liran Einav, 2005. "Estimating Risk Preferences from Deductible Choice," NBER Working Papers 11461, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Christian Ewerhart & Christoph Nitzsche, . ": On the Notion of the First Best in Standard Hidden Action Problems," IEW - Working Papers iewwp229, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  8. Bel? Jerez, 2001. "A Dual Characterization of Incentive Efficiency," UFAE and IAE Working Papers 494.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  9. Roland Strausz, . "Deterministic versus Stochastic Mechanisms in Principal--Agent Models," Papers 020, Departmental Working Papers. [Downloadable!]
    Other versions:
  10. Eren Inci, 2007. "Occupational Choice and the Quality of Entrepreneurs," Boston College Working Papers in Economics 666, Boston College Department of Economics. [Downloadable!]
  11. Alberto Bennardo & Salvatore Piccolo, 2005. "Competitive occupational choices with endogenous health risks," Levine's Working Paper Archive 784828000000000199, David K. Levine. [Downloadable!]
  12. Alberto Bennardo & Salvatore Piccolo, 2005. "Competitive Markets with Endogenous Health Risks," CSEF Working Papers 145, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
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  13. Joan Esteban & Facundo Albornoz & Paolo Vanin, 2009. "Government Information Transparency," UFAE and IAE Working Papers 774.09, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  14. Timothy J. Kehoe & David K. Levine & Edward Prescott, 2000. "Lotteries, Sunspots and Incentive Constraints," Levine's Working Paper Archive 1974, David K. Levine. [Downloadable!]
    Other versions:
  15. James J. Heckman, 1991. "Randomization and Social Policy Evaluation," NBER Technical Working Papers 0107, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Hector Chade & Edward Schlee, 2008. "Optimal Insurance with Adverse Selection," Levine's Working Paper Archive 122247000000002175, David K. Levine. [Downloadable!]
  17. Pricila Maziero & Laurence Ales, 2008. "Accounting for private information," Working Papers 663, Federal Reserve Bank of Minneapolis. [Downloadable!]
  18. Yukihiro Nishimura, 2009. "Redistributive taxation and social insurance under adverse selection in the insurance market," International Tax and Public Finance, Springer, vol. 16(2), pages 176-197, April. [Downloadable!] (restricted)
  19. Edward S. Prescott, 1999. "A primer on moral-hazard models," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 47-78. [Downloadable!]
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