We consider a dynamic Mirrlees economy in a life cycle context and study the optimal insurance arrangement. Individual productivity evolves as a Markov process and is private information. We use a first order approach in discrete and continuous time and obtain novel theoretical and numerical...

This paper explores the role of the financial sector in facilitating the flow of funds from borrowers to lenders. Unlike in traditional models of banking, the role of financial firms in our model is not to raise funds from lenders (depositors) and use them to make loans to borrowers. Rather...