Dynamic Optimal Insurance and Lack of Commitment

Alexander Karaivanov and Fernando Martin

Review of Economic Dynamics, 2015, vol. 18, issue 2, 287-305

Abstract: We analyze dynamic risk-sharing contracts between profit-maximizing insurers and risk-averse agents who face idiosyncratic income uncertainty and can self-insure through savings. We study Markov-perfect insurance contracts in which neither party can commit beyond the current period. We show that the limited commitment assumption on the insurer's side is restrictive only when he is endowed with a rate of return advantage and the agent has sufficiently large initial assets. In such a case, the agent's consumption profile is distorted relative to the first-best. In a Markov-perfect equilibrium, the agent's asset holdings determine his outside option each period and are thus an integral part of insurance contracts, unlike when the insurer can commit long-term. (Copyright: Elsevier)

Keywords: Optimal insurance; Lack of commitment; Markov-perfect equilibrium (search for similar items in EconPapers)
JEL-codes: D11 E21 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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DOI: 10.1016/j.red.2014.05.001

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