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Dynamic Insurance with Private Information and Balanced Budgets

  • 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. Copyright 1995 by The Review of Economic Studies Limited.

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

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Date of creation: 01 Jan 1995
Date of revision:
Publication status: Published in Review of Economic Studies 1995, vol. 62, pp. 577-595
Handle: RePEc:isu:genres:5249
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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