NBER Publications by Alessandro Lizzeri

We look at the life insurance industry to study the properties of long term contracts in a world where consumers cannot commit to a contract. The main issue is how contracts are designed to deal with classification risk. We present a model that captures the main features of this industry. The data is especially suited for a test of the theory since it includes information on the entire profile of future premiums. The lack of commitment by consumers shapes contracts in the way predicted by the theory. All types of contracts involve front-loading. This generates a partial lock-in of consumers. Contracts that are more front-loaded have a lower present value of premiums over the period of coverage. This is consistent with the idea that more front-loaded contracts retain better risk pools. The ...

Leasing contracts specify a rental rate and an option price at which the used good can be bought at the termination of the lease. This option price cannot be controlled when the car is sold. We show that in a world with symmetric information this additional control variable is useless; equilibrium allocations and profits to lessors are unaffected by the option prices. In contrast, under adverse selection, leasing contracts affect equilibrium allocations in a way that matches observed behavior in the car market. We show that a social planner can use leasing contracts to improve welfare but they are imperfect tools; they cannot generally achieve first best while other mechanisms can. We also show that a producer with market power can benefit from leasing contracts for two reasons: better...

An undesirable feature of Akerlof style models of adverse selection is that ownership of" used cars is independent of preferences and is therefore ad hoc. We present a dynamic model" that incorporates the market for new goods. Consumers self-select into buying new or used" goods making ownership of used goods endogenous. We show that, in contrast with Akerlof and" in agreement with reality, the used market never shuts down and that the volume of trade can be" quite substantial even in cases with severe informational asymmetries. By incorporating the" market for new goods, the model lends itself to a study of the effects of adverse selection on" manufacturers' incentives. We find that manufacturers may gain from adverse selection. We" also give an example in which the market allocatio...