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Sharing Risk Efficiently under Suboptimal Punishments for Defection

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  • Drew Saunders

    (Purdue University - Main Campus)

Abstract

I study efficient risk-sharing in an endowments economy when enforcement is achieved by the threat of reversion to punishments that may be less severe than autarkic consumption. I characterize (up to a technical condition) the set of allocations that may be interpreted as efficient with respect to some punishment convention. The conditions rationalizing such efficiency are very weak; they are (i) resource exhaustion, (ii) satisfaction of individual rationality constraints at each continuation, and (iii) finiteness of the value of the allocation under the implicit decentralizing price system. I show how efficient allocations may be decentralized, and I state versions of the Welfare Theorems for these economies.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 10 (2010)
Issue (Month): 1 ()
Pages: 17

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Handle: RePEc:bpj:bejtec:v:10:y:2010:i:1:n:17

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Related research

Keywords: risk-sharing; limited enforcement; limited commitment;

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References

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  1. Sumru Altug & Robert Miller, . "Household Choices in Equilibrium," University of Chicago - Population Research Center 87-8, Chicago - Population Research Center.
  2. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  3. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-94, March.
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  6. Hanno Lustig, 2001. "The Market Price of Aggregate Risk and the Wealth Distribution," Finance 0111004, EconWPA, revised 16 Nov 2001.
  7. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
  8. Patrick J. Kehoe & Fabrizio Perri, 2003. "Competitive equilibria with limited enforcement," Staff Report 307, Federal Reserve Bank of Minneapolis.
  9. Ligon, Ethan & Thomas, Jonathan P & Worrall, Tim, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 209-44, January.
  10. Evans, Robert & Maskin, Eric, 1989. "Efficient renegotiation--proof equilibria in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 361-369, December.
  11. Nelson, J.A., 1993. "On Testing for Full Insurance Using Consumer Expenditures Survey Data," Papers 93-02, California Davis - Institute of Governmental Affairs.
  12. Fernández-Villaverde, Jesús & Krueger, Dirk, 2011. "Consumption And Saving Over The Life Cycle: How Important Are Consumer Durables?," Macroeconomic Dynamics, Cambridge University Press, vol. 15(05), pages 725-770, November.
  13. Karsten Jeske, 2006. "Private International Debt with Risk of Repudiation," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 576-593, June.
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