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Risk sharing contracts with private information and one-sided commitment

  • Eduardo Zilberman
  • Vinicius Carrasco
  • Pedro Hemsley
Research Article
  • 112 Downloads

Abstract

In a repeated unobserved endowment economy in which agents negotiate long-term contracts with a financial intermediary, we study the risk sharing implications of the interaction between incentive compatibility constraints (due to private information) and participation constraints (due to one-sided commitment). In particular, we assume that after a default episode, agents consume their endowment and remain in autarky forever. We find that once they are away from autarky today, if the probability of drawing the highest possible endowment shock is sufficiently small, the optimal contract prevents agents from reaching autarky tomorrow and, thus, from being “impoverished.” Moreover, an invariant cross-sectional distribution of lifetime utilities (or values) exists. A numerical example shows that the mass of agents living in autarky can be zero in the limit.

Keywords

Risk sharing contracts private information One-sided commitment 

JEL Classification

D31 D82 D86 

Supplementary material

199_2018_1112_MOESM1_ESM.pdf (266 kb)
Supplementary material 1 (pdf 265 KB)

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  • Eduardo Zilberman
    • 1
  • Vinicius Carrasco
    • 2
  • Pedro Hemsley
    • 3
  1. 1.Economic Research DepartmentCentral Bank of ChileSantiagoChile
  2. 2.Department of EconomicsPUC-RioRio de JaneiroBrazil
  3. 3.Department of EconomicsUERJRio de JaneiroBrazil

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