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Implications of Endogenous Group Formation for Efficient Risk-Sharing

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  • Tessa Bold

Abstract

The existing literature on sub-game perfect risk-sharing suffers from a basic inconsistency. While a group of size "n" is able to coordinate on a risk-sharing outcome, it is assumed that deviating subgroups cannot. I relax this assumption and characterise the optimal contract among all coalition-proof history-dependent contracts. This alters the predictions of the standard dynamic limited commitment model. I show that the consumption of constrained agents depends on both the history of shocks and its interaction with the current income of other constrained agents. From this, I derive a formal test for the presence of endogenous group formation under limited commitment. Copyright � The Author(s). Journal compilation � Royal Economic Society 2009.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 119 (2009)
Issue (Month): 536 (03)
Pages: 562-591

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Handle: RePEc:ecj:econjl:v:119:y:2009:i:536:p:562-591

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Cited by:
  1. Ethan Ligon & Pierre Dubois, 2012. "Incentives & Nutrition for Rotten Kids: The Quantity & Quality of Food Allocated within Philippine Households," 2012 Meeting Papers 375, Society for Economic Dynamics.
  2. Fernando Jaramillo & Hubert Kempf & Fabien Moizeau, 2013. "Heterogeneity and the formation of risk - sharing coalitions," DOCUMENTOS DE TRABAJO 011013, UNIVERSIDAD DEL ROSARIO.
  3. Fabien MOIZEAU & Fernando JARAMILLO & Hubert KEMPF, 2011. "Heterogeneity and the Formation of Risk-Sharing Coalitions," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201111, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  4. Michail Anthropelos, 2012. "Agents' Strategic Behavior in Optimal Risk Sharing," Papers 1206.0384, arXiv.org, revised Mar 2013.

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