The Insurance Is the Lemon: Failing to Index Contracts

Barney Hartman-Glaser and Benjamin Hebert
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Barney Hartman-Glaser: University of California, Los Angeles

Research Papers from Stanford University, Graduate School of Business

Abstract: We model the widespread failure of contracts to share risk using available indices. A borrower and lender can share risk by conditioning repayments on an index. The lender has private information about the ability of this index to measure the true state the borrower would like to hedge. The lender is risk-averse, and thus requires a premium to insure the borrower. The borrower, however, might be paying something for nothing, if the index is a poor measure of the true state. We provide sufficient conditions for this effect to cause the borrower to choose a non-indexed contract instead.

Date: 2017-12
New Economics Papers: this item is included in nep-gth and nep-rmg
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The Insurance Is the Lemon: Failing to Index Contracts (2020)
Working Paper: The Insurance is the Lemon: Failing to Index Contracts (2019)
Working Paper: The Insurance is the Lemon: Failing to Index Contracts (2019)
Working Paper: The Insurance is the Lemon: Failing to Index Contracts (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:repec:ecl:stabus:3569

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