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Randomization with Asymmetric Information

  • Richard J. Arnott
  • Joseph E. Stiglitz

It is by now well-known that, in the presence of moral hazard or adverse selection, randomization of insurance premia and benefits may be Pareto efficient. This paper: i) provides a typology of the various forms that randomization may take; ii) derives necessary and/or sufficient conditions for the desirability of these various forms of randomization; iii) obtains some simple characterization theorems of the efficient random policies; iv) gives some intuition behind the results; and v) considers why randomization appears to occur less often in practice than the theory suggests it should.

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File URL: http://www.nber.org/papers/w2507.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2507.

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Date of creation: Feb 1988
Date of revision:
Publication status: published as Rand Journal of Economics, vol 19, Fall 1988, pp344-362.
Handle: RePEc:nbr:nberwo:2507
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page: http://www.nber.org
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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.
  2. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  3. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-54, Summer.
  4. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
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