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Risk-sharing Contracts with Asymmetric Information

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Listed author(s):
  • Renaud Bourlès

    (Ecole Centrale Marseille and GREQAM – IDEP, Technopôle de Château – Gombert, 38, rue Frédéric Joliot – Curie, 13451 MARSEILLE Cedex 20, France. E-mails: renaud.bourles@centrale-marseille.fr; dominique.henriet@centrale-marseille.fr)

  • Dominique Henriet

    (Ecole Centrale Marseille and GREQAM – IDEP, Technopôle de Château – Gombert, 38, rue Frédéric Joliot – Curie, 13451 MARSEILLE Cedex 20, France. E-mails: renaud.bourles@centrale-marseille.fr; dominique.henriet@centrale-marseille.fr)

Abstract

We examine how risk-sharing is impacted by asymmetric information on the probability distribution of wealth. We define the optimal incentive compatible agreements in a two-agent model with two levels of wealth. When there is complete information on the probability of the different outcomes, the resulting allocation satisfies the mutuality principle (which states that everyone's final wealth depends only upon the aggregate wealth of the economy). This is no longer true when agents have private information regarding their probability distribution of wealth. Asymmetry of information (i) makes ex-post equal sharing unsustainable between two low-risk agents, and (ii) induces exchanges when agents have the same realization of wealth.

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Article provided by Palgrave Macmillan & International Association for the Study of Insurance Economics (The Geneva Association) in its journal The Geneva Risk and Insurance Review.

Volume (Year): 37 (2012)
Issue (Month): 1 (March)
Pages: 27-56

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Handle: RePEc:pal:genrir:v:37:y:2012:i:1:p:27-56
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Cited by:

  1. Francesca Barigozzi & Renaud Bourlès & Dominique Henriet & Giuseppe Pignataro, 2017. "Pool size and the sustainability of optimal risk-sharing agreements," Theory and Decision, Springer, vol. 82(2), pages 273-303, February.
  2. Victorien Barbet & Renaud Bourlès & Juliette Rouchier, 2017. "Informal Risk-Sharing Cooperatives: The Effect of Learning and Other-Regarding Preferences," Working Papers halshs-01480539, HAL.
  3. Louis Lévy-Garboua & Claude Montmarquette & Jonathan Vaksmann & Marie Claire Villeval, 2015. "Voluntary Contributions to a Mutual Insurance Pool," Working Papers 1535, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  4. Renaud Bourlès & Juliette Rouchier, 2012. "Evolving Informal Risk-Sharing Cooperatives and Other-Regarding Preferences," AMSE Working Papers 1243, Aix-Marseille School of Economics, Marseille, France, revised Dec 2012.
  5. Mohamed Belhaj & Renaud Bourl?s & Fr?d?ric Dero?an, 2014. "Risk-Taking and Risk-Sharing Incentives under Moral Hazard," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 58-90, February.
  6. Francesca Barigozzi & Renaud Bourlès & Dominique Henriet & Giuseppe Pignataro, 2017. "Pool size and the sustainability of optimal risk-sharing agreements," Theory and Decision, Springer, vol. 82(2), pages 273-303, February.
  7. Jean-François Outreville, 2014. "The Meaning of Risk? Insights from The Geneva Risk and Insurance Review," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(4), pages 768-781, October.

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