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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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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2010-E59.

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Handle: RePEc:cmu:gsiawp:592630435
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Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890

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  1. Árpád Ábrahám & Nicola Pavoni, 2005. "The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 370-381, 04/05.
  2. Pricila Maziero & Laurence Ales, 2008. "Accounting for private information," Working Papers 663, Federal Reserve Bank of Minneapolis.
  3. Larry Epstein & Michael Peters, 1996. "A Revelation Principle For Competing Mechanisms," Working Papers peters-96-02, University of Toronto, Department of Economics.
  4. Allen, Franklin, 1985. "Repeated principal-agent relationships with lending and borrowing," Economics Letters, Elsevier, vol. 17(1-2), pages 27-31.
  5. Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
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Cited by:

  1. Gwenaël Piaser, 2014. "Common Agency Games with Common Value Exclusion, Convexity and Existence," Working Papers 2014-420, Department of Research, Ipag Business School.
  2. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Consumption and Labor Supply with Partial Insurance: An Analytical Framework," NBER Working Papers 15257, National Bureau of Economic Research, Inc.
  3. Bertola, Giuseppe & Koeniger, Winfried, 2013. "Hidden Insurance in a Moral Hazard Economy," IZA Discussion Papers 7806, Institute for the Study of Labor (IZA).
  4. Panetti, Ettore, 2011. "Unobservable savings, risk sharing and default in the financial system," MPRA Paper 29542, University Library of Munich, Germany.
  5. Bertola, Giuseppe & Koeniger, Winfried, 2010. "Public and Private Insurance with Costly Transactions," IZA Discussion Papers 5201, Institute for the Study of Labor (IZA).
  6. Augustin Landier & Guillaume Plantin, 2013. "Taxing the Rich," Sciences Po publications info:hdl:2441/3lf2qe5um58, Sciences Po.
  7. Sarolta Laczo, 2010. "Estimating Dynamic Contracts: Risk Sharing in Village Economies," 2010 Meeting Papers 687, Society for Economic Dynamics.
  8. Laurence Ales & Pricila Maziero, 2009. "Adverse Selection and Non-Exclusive Contracts," GSIA Working Papers 2010-E61, Carnegie Mellon University, Tepper School of Business.
  9. Panetti, Ettore, 2011. "A Theory of Bank Illiquidity and Default with Hidden Trades," MPRA Paper 43799, University Library of Munich, Germany, revised May 2012.

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