It follows from the above optimality condition that the two2 period incentive compatibility contract provides greater insurance cover than does self-insurance from issuing risk-free bonds.
It basically provides a special case where self-insurance could be optimal.
Next, self-insurance refers to the private financial preparations that individuals make, such as savings, private pensions, insurance and other investments.
This is because, given the gross consumption allocation, the agent is, on the margin, contemplating deviations to a lower credit level and a higher effort level (the self-insurance motive).
In the current framework, neither insurance contracts nor self-insurance by borrowing is available, and only fiat money can provide self-insurance against income fluctuations during middle age.
In the absence of an insurance contract, only fiat money can play an essential role as self-insurance against the income fluctuations of middle-aged consumers in this environment.
Second, land ownership provides self-insurance against ever-present income shocks by serving as collateral for credit (formal and informal), and as a marketable asset for expenditure smoothing.
Prevention is self-protection; control is self-insurance.
