insurance versus incentives

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1、Chapter20InsuranceVersusIncentives20.1.InsurancewithrecursivecontractsThischapterstudiesaplannerwhodesignsanefficientcontracttosupplyinsur-anceinthepresenceofincentiveconstraintsimposedbyhislimitedabilityeithertoenforcecontractsortoobservehouseholds’actionsorincomes.Wepursuetwot

2、hemes,onesubstantive,theothertechnical.Thesubstantivethemeisatensionthatexistsbetweenofferinginsuranceandprovidingincentives.Aplan-nercanovercomeincentiveproblemsbyoffering“sticksandcarrots”thatadjustanagent’sfutureconsumptionandtherebyprovidelessinsurance.Balancingincentivesaga

3、instinsuranceshapestheevolutionofdistributionsofwealthandconsumption.Thetechnicalthemeishowmemorycanbeencodedrecursivelyandhowincentiveproblemscanbemanagedwithcontractsthatretainmemoryandmakepromises.Contractsissuerewardsthatdependonthehistoryeitherofpubliclyobservableoutcomes

4、orofanagent’sannouncementsabouthisprivatelyobservedoutcomes.Historiesarelarge-dimensionalobjects.ButSpearandSrivastava(1987),ThomasandWorrall(1988),Abreu,Pearce,andStacchetti(1990),andPhelanandTownsend(1991)discoveredthatthedimensioncanbecontainedbyusinganaccountingsystemcasts

5、olelyintermsofa“promisedvalue,”aone-dimensionalobjectthatsummarizesrelevantaspectsofanagent’shistory.Workingwithpromisedvaluespermitsustoformulatethecontractdesignproblemrecursively.Threebasicmodelsaresetwithinasinglephysicalenvironmentbutassumedifferentstructuresofinformation,

6、enforcement,andstoragepossibilities.ThefirstadaptsamodelofThomasandWorrall(1988)andKocherlakota(1996b)thatfocusesoncommitmentorenforcementproblemsandhasallinformationbeingpublic.ThesecondisamodelofThomasandWorrall(1990)thathasanincentiveproblemcomingfromprivateinformationbuttha

7、tassumesawaycommitmentandenforcementproblems.Commontobothofthesemodelsisthattheinsurancecontractisassumedtobetheonlyvehicleforhouseholds–797–798InsuranceVersusIncentivestotransferwealthacrossstatesoftheworldandovertime.Thethirdmodel,createdbyAllen(1985)andColeandKocherlakota(2

8、001),extendsThomasandWorrall’s(1990)modelbyintroducingprivate