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Sovereign Insurance and Program Design: What is Optimal for the Sovereign?

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  • Miguel Messmacher

Abstract

The design of the optimal sovereign insurance contract is analyzed when: the sovereign chooses the contract; effort is not contractible; shocks are of uncertain magnitude; the sovereign can save; and the sovereign can default. Under these conditions: i) an ex ante premium leads to higher coverage; ii) the premium increases with the sovereign's incentive to take risks; iii) a deductible is chosen to limit moral hazard; iv) the deductible-to-support ratio is decreasing with the size of the realized shock; and v) the change in the choice of savings when insurance is available is ambiguous, as there is a trade-off between inducing higher effort and increasing the likelihood of default.

Suggested Citation

  • Miguel Messmacher, 2006. "Sovereign Insurance and Program Design: What is Optimal for the Sovereign?," IMF Working Papers 2006/064, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2006/064
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=18901
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    Cited by:

    1. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.

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    Keywords

    WP; insurance contract;

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