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Dynamic Insurance with Private Information and Balanced Budgets

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Author Info
Wang, Cheng
Abstract

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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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 62 (1995)
Issue (Month): 4 (October)
Pages: 577-95
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Handle: RePEc:bla:restud:v:62:y:1995:i:4:p:577-95

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  1. Alvarez-Parra, Fernando A. & Sanchez, Juan M., 2006. "Unemployment Insurance in an Economy with a Hidden Labor Market," MPRA Paper 2531, University Library of Munich, Germany. [Downloadable!]
  2. S. Rao Aiyagari & Stephen D. Williamson, 1997. "Credit in a Random Matching Model With Private Information," Game Theory and Information 9705005, EconWPA. [Downloadable!]
    Other versions:
  3. Ana Fernandes & Christopher Phelan, 1999. "A recursive formulation for repeated agency with history dependence," Staff Report 259, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  4. Dilip Mookherjee & Debraj Ray, 2002. "Contractual Structure and Wealth Accumulation," American Economic Review, American Economic Association, vol. 92(4), pages 818-849, September. [Downloadable!]
    Other versions:
  5. Atila Abdulkadiroglu & Kyle Bagwell, 2005. "Trust, reciprocity and favors in cooperative relationships," Discussion Papers 0405-22, Columbia University, Department of Economics. [Downloadable!]
  6. Cheng Wang, 2000. "Renegotiation-Proof Dynamic Contracts with Private Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 396-422, July. [Downloadable!] (restricted)
  7. Williamson, Stephen D. & Wang, Cheng, 1999. "Moral Hazard, Optimal Unemployment Insurance, and Experience Rating," Working Papers 99-03, University of Iowa, Department of Economics. [Downloadable!]
    Other versions:
  8. Stephen Williamson & Cheng Wang, 1995. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," Macroeconomics 9506002, EconWPA. [Downloadable!]
    Other versions:
  9. Espino, Emilio, 2004. "On Ramsey's Conjecture: Efficient Allocations in the Neoclassical Growth Model with Private Information," Economics Series 154, Institute for Advanced Studies. [Downloadable!]
    Other versions:
  10. Susan Athey & Ilya Segal, 2007. "An Efficient Dynamic Mechanism," Levine's Bibliography 122247000000001134, UCLA Department of Economics. [Downloadable!]
  11. Stephen Williamson, 2000. "The Research Agenda: Payment Systems and Private Money," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 2(1), November. [Downloadable!]
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