The Insurance Effect of Groups

Canice Prendergast

International Economic Review, 1992, vol. 33, issue 3, 567-81

Abstract: Many people belong to groups that partially identify their characteristics. This paper argues that when agents are risk averse, and where only group characteristics are visible rather than individual characteristics, the Pareto optimal construction of groups differs in systematic ways from standard notions of how groups should be formed. Two applications are considered: the assignment of workers to jobs, where it is shown the optimal contract does not involve maximizing output, and accident insurance, where the optimal contract does not involve complete insurance. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1992
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