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Characterization of a risk sharing contract with one-sided commitment

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  • Zhang, Yuzhe

Abstract

In this paper I provide a stopping-time-based solution to a long-term contracting problem between a risk-neutral principal and a risk-averse agent. The agent faces a stochastic income stream and cannot commit to the long-term contracting relationship. To compute the optimal contract, I also design an algorithm that is more efficient than value-function iteration.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 4 ()
Pages: 794-809

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:4:p:794-809

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Limited commitment; Risk sharing; Stopping time; Value-function iteration;

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  1. Debraj Ray, 2002. "The Time Structure of Self-Enforcing Agreements," Econometrica, Econometric Society, vol. 70(2), pages 547-582, March.
  2. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1990. "Toward a Theory of Discounted Repeated Games with Imperfect Monitoring," Econometrica, Econometric Society, vol. 58(5), pages 1041-63, September.
  3. Krüger, Dirk & Uhlig, Harald, 2004. "Competitive Risk Sharing Contracts with One-Sided Commitment," CEPR Discussion Papers 4208, C.E.P.R. Discussion Papers.
  4. Tobias Broer, 2009. "Stationary equilibrium distributions in economies with limited commitment," Economics Working Papers ECO2009/39, European University Institute.
  5. Grochulskiy, Borys & Zhang, Yuzhe, 2011. "Optimal risk sharing and borrowing constraints in a continuous-time model with limited commitment," MPRA Paper 36539, University Library of Munich, Germany.
  6. Patrick J. Kehoe & Fabrizio Perri, 2000. "International business cycles with endogenous incomplete markets," Staff Report 265, Federal Reserve Bank of Minneapolis.
  7. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  8. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 285-315.
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  10. Jonathan P. Thomas & Tim Worrall, 2007. "Unemployment Insurance under Moral Hazard and Limited Commitment: Public versus Private Provision," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(1), pages 151-181, 02.
  11. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  12. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
  13. Rui Albuquerque & Hugo Hopenhayn, 2002. "Optimal Lending Contracts and Firm Dynamics," RCER Working Papers 493, University of Rochester - Center for Economic Research (RCER).
  14. Krueger, Dirk & Perri, Fabrizio, 2011. "Public versus private risk sharing," Journal of Economic Theory, Elsevier, vol. 146(3), pages 920-956, May.
  15. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  16. Jérôme Detemple & Angel Serrat, 2003. "Dynamic Equilibrium with Liquidity Constraints," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 597-629.
  17. 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.
  18. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
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Cited by:
  1. Grochulskiy, Borys & Zhang, Yuzhe, 2011. "Optimal risk sharing and borrowing constraints in a continuous-time model with limited commitment," MPRA Paper 36539, University Library of Munich, Germany.

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