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Non-exclusive Dynamic Contracts, Competition, and the Limits of Insurance

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  • Laurence Ales
  • Pricila Maziero

Abstract

We study how the presence of non-exclusive contracts limits the amount of insurance provided in a decentralized economy. We consider a dynamic Mirrleesian economy in which agents are privately informed about idiosyncratic labor productivity shocks. Agents sign privately observable insurance contracts with multiple firms (i.e., they are non-exclusive), which include both labor supply and savings aspects. Firms have no re- striction on the contracts they can offer, interact strategically. In equilibrium, contrary to the case with exclusive contracts, a standard Euler equation holds, the marginal rate of substitution between consumption and leisure is equated to the worker’s marginal productivity. Also, each agent receives zero net present value of transfers. To sustain this equilibrium, more than one firm must be active and must also offer latent con- tracts to deter deviations to more profitable contingent contracts. In this environment, the non-observability of contracts removes the possibility of additional insurance be- yond self-insurance. To test the model, we allow firms to observe contracts at a cost. The model endogenously divides the population into agents that are not monitored and have access to non-exclusive contracts and agents that have access to exclusive contracts. We use US survey data and find that high school graduates satisfy the optimality conditions implied by the non-exclusive contracts while college graduates behave according to the second group.

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  • Laurence Ales & Pricila Maziero, "undated". "Non-exclusive Dynamic Contracts, Competition, and the Limits of Insurance," GSIA Working Papers 2010-E59, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:592630435
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    2. Golosov, M. & Tsyvinski, A. & Werquin, N., 2016. "Recursive Contracts and Endogenously Incomplete Markets," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 725-841, Elsevier.
    3. Vladimir Asriyan & Victoria Vanasco, 2019. "Security design in non-exclusive markets with asymmetric information," Economics Working Papers 1712, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2021.
    4. Mikhail Golosov & Maxim Troshkin & Aleh Tsyvinski, 2011. "Optimal Taxation: Merging Micro and Macro Approaches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 147-174, August.
    5. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2014. "Multiple Contracting in Insurance Markets," IDEI Working Papers 839, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2016.
    6. Bertola, Giuseppe & Koeniger, Winfried, 2010. "Public and Private Insurance with Costly Transactions," CEPR Discussion Papers 8062, C.E.P.R. Discussion Papers.
    7. Augustin Landier & Guillaume Plantin, 2017. "Taxing the Rich," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(3), pages 1186-1209.
    8. Giuseppe Bertola & Winfried Koeniger, 2015. "Hidden insurance in a moral-hazard economy," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 777-790, October.
    9. Ettore Panetti, 2017. "A Theory of Bank Illiquidity and Default with Hidden Trades," Review of Finance, European Finance Association, vol. 21(3), pages 1123-1157.
    10. Sarolta Laczo, 2010. "Estimating Dynamic Contracts: Risk Sharing in Village Economies," 2010 Meeting Papers 687, Society for Economic Dynamics.
    11. Carvajal, Andrés & Thereze, João, 2023. "Insurance contracts and financial markets," Mathematical Social Sciences, Elsevier, vol. 121(C), pages 8-19.
    12. Gwenaël Piaser, 2014. "Common Agency Games with Common Value Exclusion, Convexity and Existence," Working Papers 2014-420, Department of Research, Ipag Business School.
    13. Laurence Ales, 2009. "Adverse Selection and Non-exclusive Contracts," 2009 Meeting Papers 854, Society for Economic Dynamics.
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    16. Panetti, Ettore, 2011. "Unobservable savings, risk sharing and default in the financial system," MPRA Paper 29542, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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