Insuring uninsurable income

Michiko Ogaku

Papers from arXiv.org

Abstract: In an exchange economy where idiosyncratic income is private information, classic optimal contracts achieve efficiency only at the cost of immiserisation: promised utilities drift downward, driving unbounded inequality. This paper proposes an alternative recursive mechanism that shifts risk one period ahead. The mechanism fixes consumption within each period -- postponing all risk by one period -- and, when risk aversion is below a mild bound (condition (8)), this allocation is sequentially efficient. The mechanism keeps promised utilities in a bounded set, avoids immiserisation, and when the initial promise satisfies an explicit inequality linking risk aversion and income variance, it remains budget-balanced in a stationary overlapping-generations society. Thus, efficiency, sustainability, and equality of opportunity can coexist without storage or capital accumulation.

Date: 2022-04, Revised 2025-07
New Economics Papers: this item is included in nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2204.00347 Latest version (application/pdf)

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:arx:papers:2204.00347

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().