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Optimal contracts under adverse selection for staple goods efficiency of in-kind insurance

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Document pages: 33 pages

Abstract: An income loss can have a negative impact on households, forcing them toreduce their consumption of some staple goods. This can lead to health issuesand, consequently, generate significant costs for society. We suggest thatconsumers can, to prevent these negative consequences, buy insurance to securesufficient consumption of a staple good if they lose part of their income. Wedevelop a two-period two-good principal-agent problem with adverse selectionand endogenous reservation utility to model insurance with in-kind benefits.This model allows us to obtain semi-explicit solutions for the insurancecontract and is applied to the context of fuel poverty. For this application,our model allows to conclude that, even in the least efficient scenario fromthe households point of view, i.e., when the insurance is provided by amonopoly, this mechanism decreases significantly the risk of fuel poverty ofhouseholds by ensuring them a sufficient consumption of energy. Theeffectiveness of in-kind insurance is highlighted through a comparison withincome insurance, but our results nevertheless underline the need to regulatesuch insurance market.

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