Hidden Insurance in a Moral Hazard Economy

Giuseppe Bertola and Winfried Koeniger

No 7806, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: 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 form restrictions 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.

Keywords: first-order approach; principal agent; hidden action; constrained efficiency (search for similar items in EconPapers)
JEL-codes: D81 D82 E21 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013-12
New Economics Papers: this item is included in nep-cta, nep-ias, nep-mac and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published - revised version published in: RAND Journal of Economics, 2015, 46 (4), 777-790

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Related works:
Journal Article: Hidden insurance in a moral-hazard economy (2015)
Working Paper: Hidden Insurance in a Moral Hazard Economy (2014)
Working Paper: Hidden Insurance in a Moral Hazard Economy (2013)
Working Paper: Hidden insurance in a moral hazard economy (2013)
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