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Hidden insurance in a moral hazard economy

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  • Bertola, Giuseppe
  • Koeniger, Winfried

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 formrestrictions 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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Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2013/25.

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Date of creation: 2013
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Handle: RePEc:zbw:cfswop:201325

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Keywords: Hidden action; Principal agent; First-order approach; Constrained efficiency;

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