IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

The Equivalence of Lending Equilibria and Signalling-Based Insurance under Asymmetric Information

  • Bart Taub
Registered author(s):

    I present a model in which a continuum of individuals have stochastic idiosyncratic income shocks. Complete insurance is physically feasible but unattainable due to an information asymmetry; income shocks are observable only by the individuals receiving them. Any insurance institution must therefore rely on self-repoorting of income innovations. Two ways of achieving incentive-compatible self-reporting are presented. The first is a debt market with an explicit lending restriction. The second is an insurance contract that linearly filters a signal transmitted by individuals. The two are then demonstrated to be identical. Equilibrium consumption fluctuates in a random walk, which is inefficient given the physical potential for complete insurance, but is efficient given the information constraints. The results are complementary to those of Green (1987) but permit more general stochastic processes of income to be analyzed. Serial correlation of income reduces the efficiency of the insurance.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://links.jstor.org/sici?sici=0741-6261%28199023%2921%3A3%3C388%3ATEOLEA%3E2.0.CO%3B2-0&origin=repec
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 21 (1990)
    Issue (Month): 3 (Autumn)
    Pages: 388-408

    as
    in new window

    Handle: RePEc:rje:randje:v:21:y:1990:i:autumn:p:388-408
    Contact details of provider: Web page: http://www.rje.org

    Order Information: Web: https://editorialexpress.com/cgi-bin/rje_online.cgi

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:rje:randje:v:21:y:1990:i:autumn:p:388-408. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.