MUTUAL INSURANCE WITH ASYMMETRIC INFORMATION: THE CASE OF ADVERSE SELECTION

This paper examines the impact of risk heterogeneity and asymmetric information on mutual risk-sharing agreements. It displays the optimal incentive compatible sharing rule in a simple two-agent model with two levels of risk. When individual risk is public information, equal sharing of wealth is not achievable when risk heterogeneity is too large or when risk aversion is too low. However the mutualization principle still holds as agents only bear aggregate risk. This result no longer holds when risk is private information. Moreover, the asymmetry of information (i) makes equal sharing unsustainable when both individuals are low risk types (ii) induces some exchanges when agents have the same level of initial wealth and (iii) induces changes in the direction of transfer with respect to the complete information benchmark in some states of nature when risk types are independent and absolute risk aversion is decreasing and convex.Mutual agreements; Asymmetric information; Mechanism Design

Capital reserve policy, regulation and credibility in insurance

The aim of this paper is to analyze the need for capital and default regulation in insurance. Proponents of deregulation argue that these requirements are useless as insurers would hold enough capital as soon as the insured are fully informed about their default probability. Adding to the purpose the relationship between an insurer and her security holders (that is the issuance and dividend policy) we show that the second best capital reserve decided by the security holders is suboptimal whenever the return on cash inside the firm is smaller than outside. Because of limited commitment on recapitalization, disclosure of information may not be enough. Given these characteristics, State commitment to recapitalize could be an alternative regulation policy.insurance, capital reserve, regulation, recapitalization

Carbon price and optimal extraction of a polluting fossil fuel with restricted carbon capture

Among technological options to mitigate greenhouse gas (GHG) emissions, Carbon Capture and Storage technology (CCS) seems particularly promising. This technology allows to keep on extracting polluting fossil fuels without drastically increasing CO2 atmospheric concentration. We examine here a two-sector model with two primary energy resources, a polluting exhaustible resource and an expensive carbon-free renewable resource, in which an environmental regulation is imposed through a cap on the atmospheric carbon stock. We assume that only the emissions from one sector can be captured. Previous literature, based on one-sector models in which all emissions are capturable, finds that CCS technology should not be used before the threshold has been reached. We find that, when technical constraints make it impossible to capture emissions from both sectors, this result does not always hold. CCS technology should be used before the ceiling is reached if non capturable emissions are large enough. In that case, we find that energy prices paths must differ between sectors reflecting the difference of social cost of the resource according to its use. Numerical exercise show that, when the ceiling is set at 450ppm CO2, the initial carbon tax should equal 52$/tCO2 and that using CCS before the ceiling is optimal.dynamic models ; global warming ; externalities ; nonrenewable resources ; carbon capture ; energy markets

Carbon price and optimal extraction of a polluting fossil fuel with restricted carbon capture

Among technological options to mitigate greenhouse gas (GHG) emissions, Carbon Capture and Storage technology (CCS) seems particularly promising. This technology allows to keep on extracting polluting fossil fuels without drastically increasing CO2 atmospheric concentration. We examine here a two-sector model with two primary energy resources, a polluting exhaustible resource and an expensive carbon-free renewable resource, in which an environmental regulation is imposed through a cap on the atmospheric carbon stock. We assume that only the emissions from one sector can be captured. Previous literature, based on one-sector models in which all emissions are capturable, finds that CCS technology should not be used before the threshold has been reached. We find that, when technical constraints make it impossible to capture emissions from both sectors, this result does not always hold. CCS technology should be used before the ceiling is reached if non capturable emissions are large enough. In that case, we find that energy prices paths must differ between sectors reflecting the difference of social cost of the resource according to its use. Numerical exercise shows that the initial carbon tax should equal 52$/t CO2 and that using CCS before the ceiling is optimal.Nonrenewable Resources, Externalities, Carbon Capture.

Assessing the Consequences of Natural Disasters on Production Networks: A Disaggregated Approach

This article proposes a framework to investigate the consequences of natural disasters. This framework is based on the disaggregation of Input-Output tables at the business level, through the representation of the regional economy as a network of production units. This framework accounts for (i) limits in business production capacity; (ii) forward propagations through input shortages; and (iii) backward propagations through decreases in demand. Adaptive behaviors are included, with the possibility for businesses to replace failed suppliers, entailing changes in the network structure. This framework suggests that disaster costs depend on the heterogeneity of losses and on the structure of the affected economic network. The model reproduces economic collapse, suggesting that it may help understand the difference between limited-consequence disasters and disasters leading to systemic failure.Natural disasters, Economic impacts, Economic Network