<p>Here is what I thought could be a simple example. Suppose there are two periods (<span class="math-container">$t_0, t_1$</span>) and two possible states of nature (<span class="math-container">$s_1,s_2 $</span>) that arise in period <span class="math-container">$t_1$</span>. Suppose there are two agents. The first agent has an income stream that pays off only in state <span class="math-container">$s_1$</span> while, second agent's income stream pays off only in state <span class="math-container">$s_2$</span>. Consumption happens only in <span class="math-container">$t_1$</span> and both agents prefer to consume in both the states than in just one (Inada condition as consuption goes to 0 is not satisfied) and more is always better. If at <span class="math-container">$t_0$</span>, neither agent knows the state at <span class="math-container">$t_1$</span> then they might enter into a trade that ensures them positive consumption across both the states.</p>

<p>On the other hand, if, in <span class="math-container">$t_0$</span>, state is already revealed publicly (in this example even privately to one agent) an agent who has a positive pay-off in <span class="math-container">$t_1$</span> would not be interested in any trade with the unlucky agent.</p>

CC BY-SA 4.0
2019-05-18T11:24:38.110Z
2019-05-18T11:24:38.110Z
user200947
<p>I am trying to understand the statmement that 'public information kills insurance opportunity' -- referred to as <a href="https://faculty.fuqua.duke.edu/~qc2/BA532/1971%20AER%20Hirshleifer.pdf" rel="nofollow noreferrer">Hirshleifer effect</a>. Does it (in general) lead to some undesirable outcomes? Could you explain that to me with a simple example? For me it is easy to form examples of trade breaking when there is asymmetric information (adverse selection for example) and that having an undesirable effects. But I am not able to fully grasp the meaning and consequences of Hirshleifer effect. </p>

<p>Thanks </p>

<p>UPDATE: Here is what I thought could be a simple example. Suppose there are two periods (<span class="math-container">$t_0, t_1$</span>) and two possible states of nature (<span class="math-container">$s_1,s_2 $</span>) that arise in period <span class="math-container">$t_1$</span>. Suppose there are two agents. The first agent has an income stream that pays off only in state <span class="math-container">$s_1$</span> while, second agent's income stream pays off only in state <span class="math-container">$s_2$</span>. Consumption happens only in <span class="math-container">$t_1$</span> and both agents prefer to consume in both the states than in just one (Inada condition as consuption goes to 0 is not satisfied) and more is always better. If at <span class="math-container">$t_0$</span>, neither agent knows the state at <span class="math-container">$t_1$</span> then they might enter into a trade that ensures them positive consumption across both the states.</p>

<p>On the other hand, if, in <span class="math-container">$t_0$</span>, state is already revealed publicly (in this example even privately to one agent) an agent who has a positive pay-off in <span class="math-container">$t_1$</span> would not be interested in any trade with the unlucky agent.</p>

<p>Is this way of thinking in the example correct?</p>

<p>Thanks for any comment         </p>

CC BY-SA 4.0
2019-04-26T17:34:38.797Z
This is exactly right. The only way that insurances can work is if there is uncertainty at the moment of signing the insurance contract. If you learn my genetic test results that say that with very high probability I'll get a chronic disease, you'll not want to provide insurance to me, for example.
Regio
CC BY-SA 4.0
2019-04-27T04:34:14.173Z
Thank you @GabrielMartínez for confirming my intuition.
user200947
<macroeconomics><microeconomics><asymmetric-information><information>
Insurance and Hirshleifer effect
user200947
# Insurance and Hirshleifer effect

(Asked by: username_0 on 2019-02-25)

I am trying to understand the statmement that 'public information kills insurance opportunity' -- referred to as [Hirshleifer effect](https://faculty.fuqua.duke.edu/~qc2/BA532/1971%20AER%20Hirshleifer.pdf). Does it (in general) lead to some undesirable outcomes? Could you explain that to me with a simple example? For me it is easy to form examples of trade breaking when there is asymmetric information (adverse selection for example) and that having an undesirable effects. But I am not able to fully grasp the meaning and consequences of Hirshleifer effect.

Thanks

UPDATE: Here is what I thought could be a simple example. Suppose there are two periods ($t\_0, t\_1$) and two possible states of nature ($s\_1,s\_2 $) that arise in period $t\_1$. Suppose there are two agents. The first agent has an income stream that pays off only in state $s\_1$ while, second agent's income stream pays off only in state $s\_2$. Consumption happens only in $t\_1$ and both agents prefer to consume in both the states than in just one (Inada condition as consuption goes to 0 is not satisfied) and more is always better. If at $t\_0$, neither agent knows the state at $t\_1$ then they might enter into a trade that ensures them positive consumption across both the states.

On the other hand, if, in $t\_0$, state is already revealed publicly (in this example even privately to one agent) an agent who has a positive pay-off in $t\_1$ would not be interested in any trade with the unlucky agent.

Is this way of thinking in the example correct?

Thanks for any comment

**Tags:** macroeconomics, microeconomics, asymmetric-information, information

> **Comments:**
> **username_1**: This is exactly right. The only way that insurances can work is if there is uncertainty at the moment of signing the insurance contract. If you learn my genetic test results that say that with very high probability I'll get a chronic disease, you'll not want to provide insurance to me, for example.  
> **username_0**: Thank you @GabrielMartínez for confirming my intuition.  

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## 1 answers

### Answer by username_0 on 2019-05-18. Score: 0 | Accepted answer

Here is what I thought could be a simple example. Suppose there are two periods ($t\_0, t\_1$) and two possible states of nature ($s\_1,s\_2 $) that arise in period $t\_1$. Suppose there are two agents. The first agent has an income stream that pays off only in state $s\_1$ while, second agent's income stream pays off only in state $s\_2$. Consumption happens only in $t\_1$ and both agents prefer to consume in both the states than in just one (Inada condition as consuption goes to 0 is not satisfied) and more is always better. If at $t\_0$, neither agent knows the state at $t\_1$ then they might enter into a trade that ensures them positive consumption across both the states.

On the other hand, if, in $t\_0$, state is already revealed publicly (in this example even privately to one agent) an agent who has a positive pay-off in $t\_1$ would not be interested in any trade with the unlucky agent.


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