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The article shows that heterogeneous incomplete private information can explain the limited existence of guaranteed renewable health insurance (GR) contracts in an otherwise frictionless markets. We derive a unique equilibrium that can be of the form that either only a portion of the population...
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We analyze optimal hedging contracts and show that although hedging aims at sharing risk, it can lead to more risk …. This incentive problem limits the capacity to share risks and generates endogenous counterparty risk. Optimal hedging can … address the market failure caused by unregulated trading of hedging contracts among protection sellers …
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