Dynamic Insurance with Private Information and Balanced Budgets

Cheng Wang

The Review of Economic Studies, 1995, vol. 62, issue 4, 577-595

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.

Date: 1995
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Working Paper: Dynamic Insurance with Private Information and Balanced Budgets (2010)
Working Paper: Dynamic Insurance with Private Information and Balanced Budgets (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:62:y:1995:i:4:p:577-595.

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