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Risk Sharing and Incentives: Public Insurance Versus Bankruptcy Protection

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  • Andersen, Torben M
  • Bhattacharya, Joydeep
  • Wang, Min

Abstract

This study compares public social insurance and consumer bankruptcy in a life-cycle model. Without moral hazard, public insurance dominates by providing superior consumption smoothing. However, with moral hazard, bankruptcy protection becomes optimal. Its exemption levels, priced into competitive credit contracts, internalize incentive distortions and can Pareto dominate public insurance. The two policies are strategic substitutes, offering little added benefit when combined. The key trade-off is between public insurance's better risk-sharing and bankruptcy's superior management of incentive problems.

Suggested Citation

  • Andersen, Torben M & Bhattacharya, Joydeep & Wang, Min, 2025. "Risk Sharing and Incentives: Public Insurance Versus Bankruptcy Protection," CEPR Discussion Papers 20893, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20893
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    File URL: https://cepr.org/publications/DP20893
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