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Repeated Insurance Relationships in a Costly State Verification Model: With an Application to Deposit Insurance

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  • Smith, Bruce D.
  • Wang, Cheng

Abstract

We consider the problem of an insurer who enters into a repeated relationship with a set of risk averse agents in the presence of ex post verification costs. The insurer wishes to minimize the expected cost of providing these agents a certain expected utility level. We characterize the optimal contract between the insurer and the insured agents. We then apply the analysis to the provision of deposit insurance. Our results suggest - in a deposit insurance context - that it may be optimal to utilize the discount window early on, and to make deposit insurance payments only later, or not at all.
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Suggested Citation

  • Smith, Bruce D. & Wang, Cheng, 1998. "Repeated Insurance Relationships in a Costly State Verification Model: With an Application to Deposit Insurance," Staff General Research Papers Archive 5194, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:5194
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    Cited by:

    1. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.
    2. Espinosa-Vega, Marco A. & Smith, Bruce D. & Yip, Chong K., 2002. "Monetary Policy and Government Credit Programs," Journal of Financial Intermediation, Elsevier, vol. 11(3), pages 232-268, July.
    3. Ilhyock Shim, 2011. "Dynamic Prudential Regulation: Is Prompt Corrective Action Optimal?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1625-1661, December.
    4. Jain, N. & Imai, S., 2015. "Dynamic Costly State Verification with Repeated Loans: a two-period analysis," Working Papers 13889, Department of Economics, City St George's, University of London.
    5. Kocherlakota Narayana R, 2001. "Risky Collateral and Deposit Insurance," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-20, February.
    6. Boyd, John H. & Smith, Bruce D., 1999. "The Use of Debt and Equity in Optimal Financial Contracts," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 270-316, October.
    7. Cyril Monnet & Erwan Quintin, 2005. "Optimal contracts in a dynamic costly state verification model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(4), pages 867-885, November.
    8. Yi Jin & Charles K.Y. Leung & Zhixiong Zeng, 2012. "Real Estate, the External Finance Premium and Business Investment: A Quantitative Dynamic General Equilibrium Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 40(1), pages 167-195, March.
    9. Edward Simpson Prescott, 2004. "Auditing and bank capital regulation," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 90(Fall), pages 47-63.
    10. Antinolfi, Gaetano & Carli, Francesco, 2015. "Costly monitoring, dynamic incentives, and default," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 105-119.

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