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Dynamic Insurance with Private Information and Balanced Budgets

Listed author(s):
  • Wang, Cheng

This paper studies a dynamic insurance problem with bilateral asymmetric information and balanced budgets. There are two infinitely-lived agents in our model, both risk averse, and each has an i.i.d. random endowment stream which is unobservable to the other. In each period, each agent must have a non-negative consumption and together they must consume the entire aggregate endowment. Dynamic incentive compatibility in the Nash sense is defined. We give sufficient and necessary conditions for the existence of a constrained efficient contract. We show that a constrained efficient contract can be characterized in a Bellman equation. We demonstrate that the long-run distribution of expected utilities of each agent is not degenerate. We also develop an algorithm for computing the efficient contract and, in a numerical example, we find that the consumption processes of the agents form stationary Markov chains.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers Archive with number 5249.

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Date of creation: 01 Jan 1995
Publication status: Published in Review of Economic Studies 1995, vol. 62, pp. 577-595
Handle: RePEc:isu:genres:5249
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Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

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  1. Stefan Klonner, 2003. "Rotating Savings and Credit Associations When Participants are Risk Averse," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 979-1005, August.
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