The Insurance is the Lemon: Failing to Index Contracts

Barney Hartman-Glaser and Benjamin Hebert
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Barney Hartman-Glaser: UCLA

No 160, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We model the widespread failure of contracts to share risk using available indices. A borrower and lender can share risk by conditioning repayments on an index. The lender has private information about the ability of this index to measure the true state the borrower would like to hedge. The lender is risk-averse, and thus requires a premium to insure the borrower. The borrower, however, might be paying something for nothing, if the index is a poor measure of the true state. We provide sufficient conditions for this effect to cause the borrower to choose a non-indexed contract instead.

Date: 2018
New Economics Papers: this item is included in nep-gth
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Related works:
Journal Article: The Insurance Is the Lemon: Failing to Index Contracts (2020)
Working Paper: The Insurance is the Lemon: Failing to Index Contracts (2019)
Working Paper: The Insurance is the Lemon: Failing to Index Contracts (2019)
Working Paper: The Insurance Is the Lemon: Failing to Index Contracts (2017)
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