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The Insurance Effect of Groups
International Economic Review
Vol. 33, No. 3 (Aug., 1992), pp. 567-581
Published by: Wiley for the Economics Department of the University of Pennsylvania and Institute of Social and Economic Research, Osaka University
Stable URL: http://www.jstor.org/stable/2527126
Page Count: 15
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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.
International Economic Review © 1992 Economics Department of the University of Pennsylvania