Optimal risk‐sharing under adverse selection and imperfect risk perception

Abstract.  The present paper thoroughly explores second‐best efficient allocations in an insurance economy with adverse selection. We start with a natural extension of the classical model, assuming less than perfect risk perception. We characterize the constraints on efficient redistribution, and we summarize the incidence of incentives on the economy with the notions of weak and strong adverse selection. Finally, we show in what sense improving risk perception enhances welfare.     

The myth of a stable European money demand

Recent empirical studies suggest that an aggregate EC-wide money demand function is more stable than national money demand functions in the European Community. If true, this would facilitate monetary policy after Economic and Monetary Union. The evidence presented in this paper, however, shows that in general there is no relationship between the size of a currency area and the stability of its demand for money. I conclude that the stability of European money demand is a statistical artifact and has nothing to say about money demand stability in a future larger European currency area.