From ex ante to ex post risk sharing: cost-effectiveness, unfairness and adverse selection in mutual aid

We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier. Financial innovations facilitate hedging idiosyncratic risks among agents; however, aggregate risks can be hedged only with liquid assets. When risk-sharing is primitive, agents self-hedge and hold more liquid assets; this buffers aggregate risks, resulting in few correlated failures compared to when there is greater risk sharing. We apply this insight to build a model of a clearinghouse to show that as risk-sharing improves, aggregate liquidity falls but correlated failures rise. Public liquidity injections, for example, in the form of a lender-of-last-resort can reduce this systemic risk ex post, but induce lower ex-ante levels of private liquidity, which can in turn aggravate welfare costs from such injections.

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Equilibrium in competitive insurance markets with ex ante adverse selection and ex post moral hazard

Journal of Public Economics ◽

10.1016/s0047-2727(01)00128-1 ◽

2002 ◽

Vol 84 (2) ◽

pp. 251-278 ◽

Cited By ~ 9

Author(s):

William Jack

Keyword(s):

Moral Hazard ◽

Adverse Selection ◽

Insurance Markets ◽

Ex Post ◽

Ex Ante ◽

Ex Post Moral Hazard

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Referrals: Peer Screening and Enforcement in a Consumer Credit Field Experiment

American Economic Journal Microeconomics ◽

10.1257/mic.20130234 ◽

2015 ◽

Vol 7 (3) ◽

pp. 174-204 ◽

Cited By ~ 6

Author(s):

Gharad Bryan ◽

Dean Karlan ◽

Jonathan Zinman

Keyword(s):

South Africa ◽

Moral Hazard ◽

Field Experiment ◽

Empirical Evidence ◽

Adverse Selection ◽

Consumer Credit ◽

Social Pressure ◽

Theory And Practice ◽

Ex Post ◽

Ex Ante

Empirical evidence on peer intermediation lags behind both theory and practice in which lenders use peers to mitigate adverse selection and moral hazard. Using a referral incentive under individual liability, we develop a two-stage field experiment that permits separate identification of peer screening and enforcement. Our key contribution is to allow for borrower heterogeneity in both ex ante repayment type and ex post susceptibility to social pressure. Our method allows identification of selection on repayment likelihood, selection on susceptibility to social pressure, and loan enforcement. Implementing our method in South Africa we find no evidence of screening but large enforcement effects. (JEL D14, D82, G21, O12, O16)

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Optimal Contract under Moral Hazard with Soft Information

American Economic Journal Microeconomics ◽

10.1257/mic.5.4.55 ◽

2013 ◽

Vol 5 (4) ◽

pp. 55-80 ◽

Cited By ~ 5

Author(s):

Guillaume Roger

Keyword(s):

Moral Hazard ◽

Adverse Selection ◽

Soft Information ◽

Optimal Contract ◽

Strategic Complements ◽

Ex Post ◽

Ex Ante

I study a model of moral hazard with soft information: the agent alone observes the stochastic outcome of her action; hence the principal faces a problem of ex post adverse selection. With limited instruments the principal cannot solve these two problems independently; the ex post incentive for misreporting interacts with the ex ante incentives for effort. This affects the shape and properties of the optimal contract, which fails to elicit truthful revelation in all states. In this setup audit and transfer become strategic complements; this is rooted in the nonseparability of the problem. (JEL D82, D86)

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Informal Insurance Networks

The B E Journal of Theoretical Economics ◽

10.1515/bejte-2015-0006 ◽

2016 ◽

Vol 16 (2) ◽

Author(s):

Wayne Yuan Gao ◽

Eunyoung Moon

Keyword(s):

Risk Sharing ◽

Individual Risk ◽

Income Shocks ◽

Regular Structures ◽

Ex Post ◽

Ex Ante ◽

Income Shock ◽

Informational Constraint ◽

Parameter Values ◽

Stable Network

AbstractThis paper develops a model of risk sharing in which each individual’s income shock is locally shared ex-post given an ex-ante strategically formed network. Emphasizing the informational constraint of the network such that transfers can only be contingent on local information, the model provides characterizations of the ex-ante efficient network and the pairwise stable networks. While it is no surprise that the unique efficient network is the complete graph, it is interesting that any pairwise stable network features low average degree and almost 2-regular structures, even under individual risk heterogeneity, and it tends to exhibit positive assortativity in terms of risk variances. If expected incomes are also locally shared in addition to income shocks, the pairwise stable network may become more densely connected, achieving efficiency under certain parameter values.

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