Adverse selection has long been recognized as a rationale for government intervention in insurance markets and for the adoption of public compulsory insurance. A different rationale for compulsory insurance is that overconfident individuals may underinsure because they underestimate the relevant...

We consider a contracting problem between a principal who wants to be informed about relevant stochastic processes and an expert who claims to know which process will generate the data. The data generating process is known to belong to a given class.

Hume (1748) challenged the idea that a general claim (e.g. "all swans are white") can be validated by empirical evidence, no matter how compelling. We examine this issue from the perspective of a tester who must accept or reject the forecasts of a potential expert. If experts can be skeptical...

We analyze a model of participation in elections in which voting is costly and no vote is pivotal. Ethical agents are motivated to participate when they determine that agents of their type are obligated to do so. Unlike previous duty-based models of participation, in our model an ethical...

It is well known that when agents are fully rational, compulsory public insurance may make all agents better off in the Rothschild and Stiglitz (1976) model of insurance markets. We find that when sufficiently many agents underestimate their personal risks, compulsory insurance makes low-risk...

We consider a dynamic general equilibrium asset pricing model with heterogeneous agents and asymmetric information. We show how agents' different methods of gathering information affect their chances of survival in the market depending upon the nature of the information and the level of noise in...

In this paper I consider a dynamically complete market model without intrinsic uncertainty. The only uncertainty is modelled by sunspots. Agents' beliefs are heterogeneous, but eventually become homogeneous in the sense that agents' beliefs are identical in the limit. I show that if some states...

A series of financial anomalies motivated the development of new theories that modify the rational expectations ideal. Two possibilities have been systematically explored. The literature on behavioral finance relaxes the assumption that agents form beliefs according to the laws of probability...