EconPapers    
Economics at your fingertips  
 

Insurance and Inequality With Persistent Private Information

Alexander W. Bloedel, R. Vijay Krishna and Oksana Leukhina

Econometrica, 2025, vol. 93, issue 3, 821-857

Abstract: We study the implications of optimal insurance provision for long‐run welfare and inequality in economies with persistent private information. A principal insures an agent whose private type follows an ergodic, finite‐state Markov chain. The optimal contract always induces immiseration: the agent's consumption and utility decrease without bound. Under positive serial correlation, it also backloads high‐powered incentives: the sensitivity of the agent's utility with respect to his reports increases without bound. These results extend—and help elucidate the limits of—the hallmark immiseration results for economies with i.i.d. private information. Numerically, we find that persistence yields faster immiseration, higher inequality, and novel short‐run distortions. Our analysis uses recursive methods for contracting with persistent types and allows for binding global incentive constraints.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.3982/ECTA20404

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:emetrp:v:93:y:2025:i:3:p:821-857

Ordering information: This journal article can be ordered from
https://www.economet ... ordering-back-issues

Access Statistics for this article

Econometrica is currently edited by Guido W. Imbens

More articles in Econometrica from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2025-07-02
Handle: RePEc:wly:emetrp:v:93:y:2025:i:3:p:821-857