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Investment and Bilateral Insurance

Author

Listed:
  • Emilio Espino
  • Julian Kozlowski
  • Juan M. Sanchez

Abstract

Private information may limit insurance possibilities when two agents get together to pool idiosyncratic risk. However, if there is capital accumulation, bilateral insurance possibilities may improve because misreporting distorts investment. We show that if one of the Pareto weights is sufficiently large, that agent does not have incentives to misreport. This implies that, under some conditions, the full information allocation is incentive compatible when agents have equal Pareto weights. In the long run, either one of the agents goes to immiseration, or both agents’ lifetime utilities are approximately equal. The second case is only possible with capital accumulation.

Suggested Citation

  • Emilio Espino & Julian Kozlowski & Juan M. Sanchez, "undated". "Investment and Bilateral Insurance," Working Papers 86673, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:86673
    DOI: 10.1016/j.jet.2018.04.002
    as

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    More about this item

    Keywords

    Bilateral Insurance; Private Information; Investment; Contracts;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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