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Tuesday, August 3 • 2:30pm - 4:00pm
5B3 Persistent Private Information Revisited

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Alex Bloedel, Department of Economics, Stanford University; R. Vijay Krishna, Florida State University; Bruno Strulovici, Northwestern University

This paper revisits Williams’ (2011) continuous-time model of optimal dynamic insurance with persistent private information and corrects several errors in that paper’s analysis. We introduce and study the class of self-insurance contracts that are implementable as consumption-saving problems for the agent with constant taxes on savings chosen by the principal. We show that the contract asserted to be optimal in Williams (2011) is the special self-insurance contract with zero taxes. When the agent’s private endowment is mean-reverting, that contract is strictly dominated by the optimal self-insurance contract, which imposes a strictly positive tax, induces immiseration when the rate of mean-reversion is high, and sends the agent to bliss when the rate of mean-reversion is low. When the agent’s endowment is not mean-reverting, the contract derived in that paper is, in fact, optimal among all incentive compatible contracts; we provide a new explanation for its properties in terms of the agent’s indifference among all reporting strategies. These results extend to the natural discrete-time analogue of the model. Separately, Williams’ (2011) first-order approach to incentive compatibility relies on an erroneous and unjustified assumption on the space of feasible reporting strategies; our analysis does not.

Discussant
RP

Richard Peter

University of Iowa

Presenters
RV

R. Vijay Krishna

Florida State University



Tuesday August 3, 2021 2:30pm - 4:00pm EDT

Attendees (4)