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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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References

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  1. Dirk Krueger & Harald Uhlig, 2003. "Competitive Risk Sharing Contracts with One-Sided Commitment," NBER Working Papers 10135, National Bureau of Economic Research, Inc.
  2. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  3. Krueger, Dirk & Perri, Fabrizio, 2011. "Public versus private risk sharing," Journal of Economic Theory, Elsevier, vol. 146(3), pages 920-956, May.
  4. Grochulski, Borys & Zhang, Yuzhe, 2011. "Optimal risk sharing and borrowing constraints in a continuous-time model with limited commitment," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2356-2388.
  5. Debraj Ray, 2002. "The Time Structure of Self-Enforcing Agreements," Econometrica, Econometric Society, Econometric Society, vol. 70(2), pages 547-582, March.
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  7. 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.
  8. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
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  10. Jonathan Thomas & Tim Worral, 2004. "Unemployment Insurance under Moral Hazard and Limited Commitment: Public versus Private Provision," ESE Discussion Papers 95, Edinburgh School of Economics, University of Edinburgh.
  11. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(2), pages 285-315, 04.
  12. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  13. Tobias Broer, 2009. "Stationary equilibrium distributions in economies with limited commitment," Economics Working Papers ECO2009/39, European University Institute.
  14. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1990. "Toward a Theory of Discounted Repeated Games with Imperfect Monitoring," Econometrica, Econometric Society, Econometric Society, vol. 58(5), pages 1041-63, September.
  15. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
  16. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 371-96, March.
  17. Jérôme Detemple & Angel Serrat, 2003. "Dynamic Equilibrium with Liquidity Constraints," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 597-629.
  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. Grochulski, Borys & Zhang, Yuzhe, 2011. "Optimal risk sharing and borrowing constraints in a continuous-time model with limited commitment," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2356-2388.

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