The Insurance is the Lemon: Failing to Index Contracts

Barney Hartman-Glaser and Benjamin Hebert

No 25450, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We model the widespread failure of contracts to share risk using available indices. A borrower and lender can share risk by conditioning repayments on an index. The lender has private information about the ability of this index to measure the true state that the borrower would like to hedge. The lender is risk averse and thus requires a premium to insure the borrower. The borrower, however, might be paying something for nothing if the index is a poor measure of the true state. We provide sufficient conditions for this effect to cause the borrower to choose a non-indexed contract instead.

JEL-codes: D82 D86 G21 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-cta, nep-ias and nep-rmg
Note: AP CF
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Citations: View citations in EconPapers (5)

Published as BARNEY HARTMAN‐GLASER & BENJAMIN HÉBERT, 2020. "The Insurance Is the Lemon: Failing to Index Contracts," The Journal of Finance, vol 75(1), pages 463-506.

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Related works:
Journal Article: The Insurance Is the Lemon: Failing to Index Contracts (2020)
Working Paper: The Insurance is the Lemon: Failing to Index Contracts (2019)
Working Paper: The Insurance is the Lemon: Failing to Index Contracts (2018)
Working Paper: The Insurance Is the Lemon: Failing to Index Contracts (2017)
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