Rights to retrade, free-riding and insurance requirement

Abstract

Jacklin (1987) shows that if ex-post retrading is allowed, the optimal risk-sharing contract in the Diamond–Dybvig (1983) model is unraveled because of the free-riding incentives. I construct a retrading model with a contract the offer of which depends on the proportion of insured agents, to find out in what circumstances the agents can be insured. A minimum insurance requirement can improve welfare upon the Autarky equilibrium by providing partial insurance.