Cherbonnier, Frédéric (2021) Optimal insurance for time-inconsistent agents. IAST working paper, n. 21-123, Toulouse

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Official URL : http://iast.fr/pub/126129

Abstract

We examine the provision of insurance against non-observable liquidity shocks for time-inconsistent agents who can privately store resources. When lack of self-control is strong enough, optimal contracts are similar to individual nancial accounts with remunerated savings; and costly borrowing. The corresponding rate of return decreases with savings, which gives a theoretical rationale for pension accounts with decreasing incentive schemes, as implemented in most developed countries. Extending the model to an innite horizon, we show that, in the presence of repeated shocks, optimal contracts lead to impoverishment almost surely. Usury laws, capping interest rates, worsen this tendency to over-indebtedness for consumers with low risk aversion. By contrast, hidden storage constrains resource allocation for time-consistent agents, so that optimal contracts induce them to accumulate wealth. Those results show how lack of self-control changes the nature of optimal savings and borrowing instruments, with normative implications in terms of tax policy and credit regulation.

Item Type: Monograph (Working Paper)
Language: English
Date: September 2021
Place of Publication: Toulouse
Uncontrolled Keywords: Time-inconsistency, self-control, mechanism design, insurance, over-indebtedness, retirement savings, consumer credit, credit regulation, saving incentives
JEL Classification: C61 - Optimization Techniques; Programming Models; Dynamic Analysis
C63 - Computational Techniques; Simulation Modeling
C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
D82 - Asymmetric and Private Information
E21 - Macroeconomics - Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
H21 - Efficiency; Optimal Taxation
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Institution: Université de Toulouse 1
Site: UT1
Date Deposited: 12 Nov 2021 09:29
Last Modified: 12 Nov 2021 09:29
OAI Identifier: oai:tse-fr.eu:126129
URI: https://publications.ut-capitole.fr/id/eprint/43908
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