Endogenous Partial Insurance and Inequality

55 Pages Posted: 25 Sep 2015 Last revised: 2 Jan 2019

See all articles by Eric Mengus

Eric Mengus

HEC Paris - Economics & Decision Sciences

Roberto Pancrazi

Independent

Date Written: October 27, 2016

Abstract

In this paper, we propose a model of endogenous partial insurance and we investigate its implications for macroeconomic outcomes, such as wealth inequality, asset accumulation, interest rate, and consumption smoothing. To this end, we include participation costs to state-contingent asset markets into an otherwise standard Aiyagari (1994) model. We highlight the resulting non-monotonic relationship between wealth and insurance-market participation when insurance is costly. Poor households remain uninsured, middle-class households participate in the insurance market, while rich households decide to self-insure by only purchasing risk-free assets. After theoretically characterizing the endogenous partial equilibrium, we quantify its effect, emphasizing the roles of a participation channel and an interest rate channel.

Keywords: Wealth inequality, Participation costs, Endogenous Partial Insurance

JEL Classification: D31, E21, G11

Suggested Citation

Mengus, Eric and Pancrazi, Roberto, Endogenous Partial Insurance and Inequality (October 27, 2016). HEC Paris Research Paper No. ECO/SCD-2015-1108. Available at SSRN: https://ssrn.com/abstract=2662437 or http://dx.doi.org/10.2139/ssrn.2662437

Eric Mengus (Contact Author)

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

Roberto Pancrazi

Independent

No Address Available

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