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The Insurance Effect of Groups

Canice Prendergast
International Economic Review
Vol. 33, No. 3 (Aug., 1992), pp. 567-581
DOI: 10.2307/2527126
Stable URL: http://www.jstor.org/stable/2527126
Page Count: 15
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The Insurance Effect of Groups
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Abstract

Many people belong to groups which partially identify their characteristics. This paper argues that when agents are risk averse, and where only group characteristics are visible rather than individual characteristics, the Pareto optimal construction of groups differs in systematic ways from standard notions of how groups should be formed. Two applications are considered: the assignment of workers to jobs, where it is shown the optimal contract does not involve maximizing output and accident insurance, where the optimal contract does not involve complete insurance.

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