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Hidden insurance in a moral hazard economy

  • Bertola, Giuseppe
  • Koeniger, Winfried

We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional formrestrictions ensure that individual objective functions are optimized by an effort and insurance combination that is unique and satisfies first- and second-order conditions. Modeling insurance incompleteness in terms of costly production of private insurance services, we characterize the constrained inefficiency arising in general equilibrium from competitive pricing of nonexclusive financial contracts.

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Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2013/25.

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Date of creation: 2013
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Handle: RePEc:zbw:cfswop:201325
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  1. Richard J. Arnott & Joseph E. Stiglitz, 1983. "Moral Hazard and Optimal Commodity Taxation," NBER Working Papers 1154, National Bureau of Economic Research, Inc.
  2. Bisin, A. & Guaitoli, D., 1998. "Moral Hazard and Non-Exclusive Contracts," Working Papers 98-24, C.V. Starr Center for Applied Economics, New York University.
  3. Bisin, Alberto & Gottardi, Piero, 1999. "Competitive Equilibria with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 87(1), pages 1-48, July.
  4. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.
  5. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  6. Tsyvinski, A. & Golosov, M., 2004. "Optimal Taxation with Endogenous Insurance Markets," 2004 Meeting Papers 124, Society for Economic Dynamics.
  7. Laurence Ales & Pricila Maziero, . "Non-exclusive Dynamic Contracts, Competition, and the Limits of Insurance," GSIA Working Papers 2010-E59, Carnegie Mellon University, Tepper School of Business.
  8. Harold L. Cole & Narayana R. Kocherlakota, 1999. "Efficient allocations with hidden income and hidden storage," Staff Report 238, Federal Reserve Bank of Minneapolis.
  9. Sebastian Koehne & Nicola Pavoni & Arpad Abraham, 2010. "On the First-Order Approach in Principal-Agent Models with Hidden Borrowing and Lending," 2010 Meeting Papers 947, Society for Economic Dynamics.
  10. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February.
  11. Raj Chetty & Emmanuel Saez, 2010. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," NBER Chapters, in: Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES), pages 85-114 National Bureau of Economic Research, Inc.
  12. Árpád Ábrahám & Nicola Pavoni, 2005. "The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 370-381, 04/05.
  13. Dirk Krueger & Fabrizio Perri, 2009. "Public versus Private Risk Sharing," NBER Working Papers 15582, National Bureau of Economic Research, Inc.
  14. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
  15. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 10(1), pages 8-23, February.
  16. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
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