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Risk Aversion, Insurance, and the Efficiency-Equality Tradeoff

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  • Samuel Bowles

    (University of Massachusetts Amherst)

  • Herbert Gintis

Abstract

Under conditions of informational asymmetry, redistributing the property rights may improve work incentives but lead to an inefficient choice of entrepreneurial risk. We present a model in which reassignment of property rights does not affect factor prices and we show that there exist egalitarian asset redistributions that enhance allocative efficiency. The scope for such redistributions can be broadened by offering fair insurance protecting the independent entrepreneur against risk unassociated with the production process and against production uncertainties that are unrelated to the quality of their individual decisions. The market will generally supply insurance of this type suboptimally.

Suggested Citation

  • Samuel Bowles & Herbert Gintis, 2000. "Risk Aversion, Insurance, and the Efficiency-Equality Tradeoff," UMASS Amherst Economics Working Papers 2000-03, University of Massachusetts Amherst, Department of Economics.
    • Handle: RePEc:ums:papers:2000-03
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    File URL: http://www.umass.edu/economics/publications/econ2000_03.pdf
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    References listed on IDEAS

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    Cited by:

    1. Samuel Bowles, 2000. "Globalization and Redistribution: Feasible Egalitarianism in a Competitive World," Working Papers wp34, Political Economy Research Institute, University of Massachusetts at Amherst.

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