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on Contract Theory and Applications |
| By: | Bell-Aldeghi, Rosalind |
| Abstract: | As health expenditure and need for corresponding funding rises, resorting to topping up insurance can seem natural. Complementary and supplementary insurances are both topping up contracts and, as such, are treated as one in the theoretical literature on optimal insurance. We argue that distinguishing them is crucial, and should be considered carefully when defining policies impacting the structure of the health insurance system, as these two kinds of insurance can have opposite effects on social insurance coverage. \indent In this model, the optimal social insurance rate is defined endogenously and varies according to redistribution and the ex-post moral hazard characteristics of the insurance. This game has three stages and is solved through backward induction. The optimal social insurance rate is chosen first, by maximising social welfare. Second, individuals choose their private complementary and supplementary contracts. In the third stage they decide on their level of labour and consumption of health and other goods. \indent Results indicate that whereas the presence of complementary insurance decreases the optimal size of social insurance, the offset effects of supplementary insurance can improve welfare. |
| Keywords: | Social insurance; health insurance; ex-post moral hazard; topping up; redistribution. |
| JEL: | D82 I13 I18 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92417&r=all |
| By: | Romuald Elie; Emma Hubert; Thibaut Mastrolia; Dylan Possama\"i |
| Abstract: | We study the problem of demand response contracts in electricity markets by quantifying the impact of considering a mean-field of consumers, whose consumption is impacted by a common noise. We formulate the problem as a Principal-Agent problem with moral hazard in which the Principal - she - is an electricity producer who observes continuously the consumption of a continuum of risk-averse consumers, and designs contracts in order to reduce her production costs. More precisely, the producer incentivises the consumers to reduce the average and the volatility of their consumption in different usages, without observing the efforts they make. We prove that the producer can benefit from considering the mean-field of consumers by indexing contracts on the consumption of one Agent and aggregate consumption statistics from the distribution of the entire population of consumers. In the case of linear energy valuation, we provide closed-form expression for this new type of optimal contracts that maximises the utility of the producer. In most cases, we show that this new type of contracts allows the Principal to choose the risks she wants to bear, and to reduce the problem at hand to an uncorrelated one. |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1902.10405&r=all |
| By: | Nyborg, Karine (Dept. of Economics, University of Oslo) |
| Abstract: | The perfectly competitive market – a hypothetical situation free of market failure – serves as a benchmark for economic theory, providing the basis for the two fundamental welfare theorems. The radical abstractions of this idea makes it hard to grasp its full implications, however. In this essay, I explore the perfectly competitive market using literary fiction. Part I discusses fiction as a tool for economic theory. Part II is a science fiction story about two economists travelling to the perfectly competitive market for their honeymoon. Part III develops main theoretical insights emerging from the story. First, to preclude market failure, complete social isolation must prevail. Second, the requirements of symmetric information and no external effects are extremely hard to reconcile, leading to an impossibility result: if trade is permitted anytime, and deliberate, welfare-relevant learning is feasible, no perfectly competitive market can exist. |
| Keywords: | Welfare theorems; narratives; social interaction; symmetric information; complete contracts |
| JEL: | A11 A12 B49 D60 D62 D82 |
| Date: | 2019–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2019_002&r=all |
| By: | Zsolt Bihary; P\'eter Ker\'enyi |
| Abstract: | The gig economy, where employees take short-term, project-based jobs, is increasingly spreading all over the world. In this paper, we investigate the employer's and the worker's behavior in the gig economy with a dynamic principal-agent model. In our proposed model the worker's previous decisions influence his later decisions through his dynamically changing participation constraint. He accepts the contract offered by the employer when his expected utility is higher than the irrational valuation of his effort's worth. This reference point is based on wages he achieved in previous rounds. We formulate the employer's stochastic control problem and derive the solution in the deterministic limit. We obtain the feasible net wage of the worker, and the profit of the employer. Workers who can afford to go unemployed and need not take a gig at all costs will realize high net wages. Conversely, far-sighted employers who can afford to stall production will obtain high profits. |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1902.10021&r=all |