Non-exclusive dynamic contracts, competition, and the limits of insurance

Abstract

We study how the presence of non-exclusive contracts limits the amount of insurance provided in a decentralized economy. We consider a dynamic Mirrleesian economy in which agents are privately informed about idiosyncratic labor productivity shocks. Agents sign privately observable insurance contracts with multiple firms (i.e., they are non-exclusive). Contracts specify both labor and savings requirements. Firms have no restriction on the contracts they can offer and interact strategically. In equilibrium, contrary to the case with exclusive contracts, a standard Euler equation holds, and the marginal rate of substitution between consumption and leisure is equated to the worker's marginal productivity. Also, each agent receives zero net present value of transfers. These conditions imply the equilibrium allocation is equivalent to a standard incomplete markets model. To sustain this equilibrium, more than one firm must be active and must also offer latent contracts to deter deviations to more profitable contingent contracts. In this environment, the non-observability of contracts removes the possibility of additional insurance beyond self-insurance.

Consumption and Labor Supply with Partial Insurance: An Analytical Framework

“…Deaton (1997) suggests an alternative approach: "Although it is possible to examine the mechanisms, the insurance contracts, tithes and transfers, their multiplicity makes it attractive to look directly at the magnitude that is supposed to be smoothed, namely consumption." 3 Our framework combines basic self-insurance in the Bewley tradition (through borrowing/lending and labor supply) with an assumption that insurance-in some form-exists against a fraction of permanent wage risk. In the spirit of Deaton's 1 Recent examples of models displaying partial insurance include Krueger and Perri (2006), Attanasio and Pavoni (2007), Blundell et al, (2008), and Ales and Maziero (2009).…”

“…3 Our framework combines basic self-insurance in the Bewley tradition (through borrowing/lending and labor supply) with an assumption that insurance-in some form-exists against a fraction of permanent wage risk. In the spirit of Deaton's 1 Recent examples of models displaying partial insurance include Krueger and Perri (2006), Attanasio and Pavoni (2007), Blundell et al, (2008), and Ales and Maziero (2009). 2 Examples are investigations of self-insurance and individual and family labor supply (Heathcote, Storesletten and Violante, 2008a), bankruptcy laws (Livshits, MacGee and Tertilt, 2007), consumer durables (Fernandez-Villaverde and Krueger, 2004), and government redistribution to the poor (Hubbard, Skinner and Zeldes, 1995;Low, Meghir and Pistaferri, 2006).…”

Financial Intermediation and Deposit Contracts: A Strategic View

“…With respect to the first issue, the authors consider the presence of a unique bank in the economy, this bank offers a deposit contract through which the 2 In the same economy, competition through menus of exclusive contracts leads to inexistence issues while when an equilibrium exists the seller trades different quantities according to the quality of his good, in line with the results obtained in Rothschild and Stiglitz (1976). first best allocation in the economy can be achieved.…”

Family Firms, Bank Relationships, and Financial Constraints: A Comprehensive Score Card

“…The MH setting we consider assumes full commitment and exclusivity. It is known from the literature that if the exclusivity assumption is relaxed or the agent can engage in hidden trades, the constrained efficient contract can be equivalent to a simple debt contract (Allen, ; Cole and Kocherlakota, ; Ales and Maziero, ; Kirpalani, ). Although we acknowledge that the assumption of (non)exclusivity is important in terms of how the financial constraints are interpreted, we do feature a range of financial regimes, including borrowing and lending, and let the data pick the best‐fitting regime…”