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Dynamic Risk Sharing with Prepayment

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I analyze the role of prepayment in a dynamic risk-sharing setting with information and commitment frictions. An insurance platform contracts with a risk-averse agent with stochastic income. Part of the income can be withheld in escrow as a prepayment. I consider three endogenously incomplete markets settings with different obstacles to risk sharing: limited commitment, private information due to hidden income, and both. I show that prepayment alleviates the limited commitment problem and improves the degree of risk sharing, including possibly to full insurance depending on the model parameters; however, prepayment is ineffective in the private information settings. In the setting with both limited commitment and private information frictions, I show that private information is the binding constraint.

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  • Alexander Karaivanov, 2026. "Dynamic Risk Sharing with Prepayment," Discussion Papers dp26-06, Department of Economics, Simon Fraser University.
    • Handle: RePEc:sfu:sfudps:dp26-06
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    1. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
    2. Townsend, Robert M, 1982. "Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1166-1186, December.
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