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Working Paper
Insurance and Inequality with Persistent Private Information
This paper studies the implications of optimal insurance provision for long-run welfare and inequality in economies with persistent private information. We consider a model in which a principal insures an agent whose privately observed endowment follows an ergodic, finite Markov chain. The optimal contract always induces immiseration: the agent’s consumption and utility decrease without bound. Under positive serial correlation, the optimal contract also features backloaded high-powered incentives: the sensitivity of the agent’s utility with respect to his report increases without bound. ...
Working Paper
A Quantitative Theory of the Credit Score
What is the role of credit scores in credit markets? We argue that it is a stand in for a market assessment of a person's unobservable type (which here we take to be patience). We pose a model of persistent hidden types where observable actions shape the public assessment of a person's type via Bayesian updating. We show how dynamic reputation can incentivize repayment without monetary costs of default beyond the administrative cost of filing for bankruptcy. Importantly we show how an economy with credit scores implements the same equilibrium allocation. We estimate the model using both ...
Working Paper
Insurance and Inequality with Persistent Private Information
This paper studies the optimal tradeoff between insurance and inequality in economies with persistent private information.We consider a principal-agent model in which the principal insures the agent against privately-observed shocks to his endowment, which follows an ergodic finite-state Markov chain that may exhibit arbitrary serial correlation. The optimal contract always induces immiseration: the agent’s consumption and utility become arbitrarily negative in the long run. When the endowment is positively serially correlated, the optimal contract provides increasingly high-powered ...
Working Paper
Insurance and Inequality with Persistent Private Information
This paper studies the implications of optimal insurance provision for long-run welfare and inequality in economies with persistent private information. We consider a model in which a principal insures an agent whose privately observed endowment follows an ergodic, finite Markov chain. The optimal contract always induces immiseration: the agent’s consumption and utility decrease without bound. Under positive serial correlation, the optimal contract also features backloaded high-powered incentives: the sensitivity of the agent’s utility with respect to his report increases without bound. ...