We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional form restrictions ensure that...

We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional form restrictions ensure that...

We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional formrestrictions ensure that...

This paper examines the first order approach to moral hazard problems in which the agent can secretly save and borrow. The paper shows that hidden saving constrains the concavity of the agent's problem even for CARA utility and additively separable effort disutility in an important way:...

Private information and limited enforcement are two frictions that impede the provision of first best insurance against income risk. To mitigate these frictions, insurers make costly investments into technologies such as auditing and enforcement. The implicit assumption throughout most of the...

We revisit the role of limited commitment in a dynamic risk-sharing setting with private information. We show that a Markov-perfect equilibrium, in which agent and insurer cannot commit beyond the current period, and an infinitely-long contract to which only the insurer can commit, implement...