Social Insurance, Information Revelation, and Lack of Commitment

January 2016
Mikhail Golosov, Luigi Iovino

We study the optimal provision of insurance against unobservable idiosyncratic shocks in a setting in which a benevolent government cannot commit. A continuum of agents and the government play an inÖnitely repeated game. Actions of the government are constrained by the threat of reverting to the worst perfect Bayesian equilibrium (PBE). We construct a recursive problem that characterizes the allocation of resources and the revelation of information on the Pareto frontier of the set of PBE. We show that the amount of information revealed by anagent depends on the continuation utility with which he enters the period. Agents who enter the period with low continuation utility reveal no information about their current shocks and receive no insurance. Agents who enter the period with high continuation utility reveal precise information about their current shocks and receive ìsecond bestî insurance as in economies with perfect commitment by the government.