Doubts , Asymmetries , and Insurance ∗
نویسنده
چکیده
This paper studies an insurance problem where agents doubt their forecasting models. Using Hansen-Sargent multiplier preferences, these doubts are represented as sets of probability distributions that are statistically hard to discriminate. Agents differ endogenously in two aspects their forecasting models and the extent of doubts surrounding these models. This heterogeneity gives rise to a new insurance channel that depends on sensitivity of marginal utilities to changes in consumption. We show how introducing a small amount of doubts can keep long run inequality bounded in settings when agents have exogenous heterogeneous beliefs or heterogeneous information about private insurance needs. The transient wealth dynamics delivers countercyclical prices of risk and generates motives for trading on news shocks. ∗I am especially indebted to Thomas Sargent, Jaroslav Borovicka and Mikhail Golosov for their advice on this project. I also thank Tim Cogley, Lars Peter Hansen, Andrew Atkeson, Pierre Olivier Weill, Christopher Phelan, V.V. Chari, Larry Jones, Aleh Tsyvinski, Victor Tsyrennikov, Max Croce, David Evans, Jesse Perla, Chris Tonneti, Gaston Navarro, Isaac Baley, Andres Blanco, Anusha Nath and the participants at the Becker Friedman Institute, SED (Seoul) for helpful comments and suggestions. †Economics Department; University of Minnesota [email protected]
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