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The Insurance Effect of Groups

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  • Prendergast, Canice

Abstract

Many people belong to groups that partially identify their characteristics. This paper argues that when agents are risk averse, and where only group characteristics are visible rather than individual characteristics, the Pareto optimal construction of groups differs in systematic ways from standard notions of how groups should be formed. Two applications are considered: the assignment of workers to jobs, where it is shown the optimal contract does not involve maximizing output, and accident insurance, where the optimal contract does not involve complete insurance. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Prendergast, Canice, 1992. "The Insurance Effect of Groups," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 567-581, August.
  • Handle: RePEc:ier:iecrev:v:33:y:1992:i:3:p:567-81
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    Cited by:

    1. Kräkel, Matthias, 2012. "Competitive careers as a way to mediocracy," European Journal of Political Economy, Elsevier, vol. 28(1), pages 76-87.
    2. Emir Kamenica & Matthew Gentzkow, 2011. "Bayesian Persuasion," American Economic Review, American Economic Association, vol. 101(6), pages 2590-2615, October.
    3. Alma Cohen, 2012. "Asymmetric Learning in Repeated Contracting: An Empirical Study," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 419-432, May.
    4. Perri, Timothy J., 1995. "Is there a winner's curse in the labor market?," Journal of Economic Behavior & Organization, Elsevier, vol. 28(1), pages 79-89, September.
    5. Peng Shi & Wei Zhang, 2016. "A Test of Asymmetric Learning in Competitive Insurance With Partial Information Sharing," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(3), pages 557-578, September.
    6. Kiyotaki, Fumi, 2010. "Hold-up and the inefficiency of job assignments," Research in Economics, Elsevier, vol. 64(1), pages 36-44, March.
    7. Cassidy, Hugh & DeVaro, Jed & Kauhanen, Antti, 2016. "Promotion signaling, gender, and turnover: New theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 126(PA), pages 140-166.
    8. Kräkel, Matthias, 2012. "Competitive careers as a way to mediocracy," European Journal of Political Economy, Elsevier, vol. 28(1), pages 76-87.

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