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Persistent Private Information

  • Noah Williams


This paper studies the design of optimal contracts in dynamic environments where agents have private information that is persistent. In particular, I focus on a continuous time version of a benchmark insurance problem where a risk averse agent would like to borrow from a risk neutral lender to stabilize his income stream. The income stream is private information to the borrower and is persistent. I find that the optimal contract conditions on the agent's reported endowment as well as two additional state variables: the agent's utility and marginal utility under the contract. I show how persistence alters the nature of the contract, and consider an exponential utility example which can be solved in closed form. Unlike the previous discrete time models with i.i.d. private information, the agent's consumption under the contract may grow over time. Furthermore, in my setting the efficiency losses due to private information increase with the persistence of the endowment, and the distortions vanish as I approximate an i.i.d. endowment.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 360.

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Date of creation: 2008
Date of revision:
Handle: RePEc:red:sed008:360
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  19. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
  20. Biais, Bruno & Mariotti, Thomas & Plantin, Guillaume & Rochet, Jean-Charles, 2004. "Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications," IDEI Working Papers 312, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2006.
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