HIDDEN INFORMATION IN INSURANCE CONTRACT IN MARKET WITH RISK-AVERSE AGENTS
is
= maximum insurance value
signed
BECAUSE OF RISK AVERSION:
=
agreed with the bank average risk
in the market
If the insurance company fixes a premium equal to the average risk in the market it goes bankrupt because the effective risk reflecting the composition of its contracts would be higher than that. Thus,
the
Alternatively, the government may decide to enact a system of
HIDDEN INFORMATION IN LABOUR MARKET
agent
productivity of H agent
productivity of L H's reservation wage L's reservation wage
labour supply is fixed if market
wage > reservation wage
Symmetric information equilibrium:
hidden information: the pooling equilibrium
condition for pooling equilibrium
In the pooling equilibrium H agents are receiving the same wage given to L agents. H agents have an incentive to signal their better quality.
utility of H utility of L
. We assume here for simplicity that education does not affect worker's productivity.
e
simplifying assumption:
H's indifference curves
L's indiffernce curves
which equilibrium will be selected
depends on firms' decisions concerning the minimum education attainment e*
accepted as a quality signal
if e* =
here education is not a signal
ing
