Dynamic consistency of insurance contracts under enforcement by exclusion (Q1109667)

An insurance institution offsets individual income shocks with a contract that takes advantage of the cross-sectional heterogeneity of the shocks. Individuals with temporarily high incomes will wish to avoid the redistributive taxes imposed by the contract; these individuals are permitted to defect, but at the cost of forsaking all future benefits. Operator methods like those used by \textit{Ch. Whiteman} [ibid. 9, 225-240 (1985; Zbl 0655.90012)] characterize the conditions under which on defection will occur. If the contract is identified with redistributive government programs, the central conclusion is that such contracts will be associated with high-income, advanced economies.