NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Randomization with Asymmetric Information

Richard J. Arnott, Joseph E. Stiglitz

NBER Working Paper No. 2507
Issued in February 1988

It is by now well-known that, in the presence of moral hazard or adverse selection, randomization of insurance premia and benefits may be Pareto efficient. This paper: i) provides a typology of the various forms that randomization may take; ii) derives necessary and/or sufficient conditions for the desirability of these various forms of randomization; iii) obtains some simple characterization theorems of the efficient random policies; iv) gives some intuition behind the results; and v) considers why randomization appears to occur less often in practice than the theory suggests it should.

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Document Object Identifier (DOI): 10.3386/w2507

Published: Rand Journal of Economics, vol 19, Fall 1988, pp344-362.

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