Insurance and Inequality with Persistent Private Information

Alex Bloedel, R. Vijay Krishna and Oksana Leukhina

No 2018-020, Working Papers from Federal Reserve Bank of St. Louis

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.

Keywords: immiseration; insurance; inequality; backloaded incentives; recursive contracts; persistent private information (search for similar items in EconPapers)
JEL-codes: C73 D30 D31 D80 D82 E61 (search for similar items in EconPapers)
Pages: 81 pages
Date: 2018-09-07, Revised 2024-08-11
New Economics Papers: this item is included in nep-cta, nep-gth, nep-mic and nep-upt
Note: This paper subsumes an earlier working paper circulated as “Misery, Persistence, and Growth” (Bloedel and Krishna 2015).
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2018-020

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DOI: 10.20955/wp.2018.020

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