Working Paper: NBER ID: w28489
Authors: Gaetano Gaballo; Guillermo Ordoez
Abstract: In absence of insurance contracts to share risk, public information is a double-edged sword. On the one hand, it empowers self-insurance as agents better react to shocks, reducing risk. On the other hand, it weakens market-insurance as common knowledge of shocks restricts trading risk. We embody these two faces of information in a single general-equilibrium model. We characterize the conditions under which market-insurance is superior, and then public information – even though costless and precise – is socially undesirable. In the absence of information, however, market-insurance is still underprovided as individuals fail to internalize its general equilibrium benefits.
Keywords: No keywords provided
JEL Codes: D52; D53; D62; D8; E21; G11; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Public information (H49) | Self-insurance (G52) |
| Self-insurance (G52) | Labor supply decisions (J22) |
| Public information (H49) | Market insurance (G10) |
| Market insurance (G10) | Willingness to trade risky assets (G19) |
| Public information (H49) | Common knowledge of shocks (D80) |
| Common knowledge of shocks (D80) | Reservation price for sellers (D44) |
| Common knowledge of shocks (D80) | Reservation price for buyers (D44) |
| Reservation price for sellers (D44) | No trade (F19) |