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Mutual Insurance With Asymmetric Information: The Case Of Adverse Selection

  • Renaud Bourlès

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)

  • Dominique Henriet

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)

This paper examines the impact of risk heterogeneity and asymmetric information on mutual risk-sharing agreements. It displays the optimal incentive compatible sharing rule in a simple two-agent model with two levels of risk. When individual risk is public information, equal sharing of wealth is not achievable when risk heterogeneity is too large or when risk aversion is too low. However the mutualization principle still holds as agents only bear aggregate risk. This result no longer holds when risk is private information. Moreover, the asymmetry of information (i) makes equal sharing unsustainable when both individuals are low risk types (ii) induces some exchanges when agents have the same level of initial wealth and (iii) induces changes in the direction of transfer with respect to the complete information benchmark in some states of nature when risk types are independent and absolute risk aversion is decreasing and convex.

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Paper provided by HAL in its series Working Papers with number halshs-00278178.

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Date of creation: 09 May 2008
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Handle: RePEc:hal:wpaper:halshs-00278178
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  1. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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  3. Renaud Bourlès & Dominique Henriet, 2008. "Mutual Insurance With Asymmetric Information: The Case Of Adverse Selection," Working Papers halshs-00278178, HAL.
  4. Garance Genicot & Debraj Ray, 2003. "Group Formation in Risk--Sharing Arrangements," Review of Economic Studies, Wiley Blackwell, vol. 70(1), pages 87-113, January.
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  19. Coate, Stephen & Ravallion, Martin, 1993. "Reciprocity without commitment : Characterization and performance of informal insurance arrangements," Journal of Development Economics, Elsevier, vol. 40(1), pages 1-24, February.
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