Sovereign Insurance and Program Design: What is Optimal for the Sovereign?

Author/Editor:

Miguel Messmacher

Publication Date:

March 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The design of the optimal sovereign insurance contract is analyzed when: the sovereign chooses the contract; effort is not contractible; shocks are of uncertain magnitude; the sovereign can save; and the sovereign can default. Under these conditions: i) an ex ante premium leads to higher coverage; ii) the premium increases with the sovereign's incentive to take risks; iii) a deductible is chosen to limit moral hazard; iv) the deductible-to-support ratio is decreasing with the size of the realized shock; and v) the change in the choice of savings when insurance is available is ambiguous, as there is a trade-off between inducing higher effort and increasing the likelihood of default.

Series:

Working Paper No. 2006/064

Subject:

Consumption Insurance Insurance companies Moral hazard Tax incentives

English

Publication Date:

March 1, 2006

ISBN/ISSN:

9781451863246/1018-5941

Stock No:

WPIEA2006064

Pages:

30

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