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Optimal dynamic risk sharing when enforcement is a decision variable

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  • Koeppl, Thorsten V.

Abstract

Societies provide institutions that are costly to set up, but able to enforce long-run relationships. We study the optimal decision problem of using self-governance for risk sharing or governance through enforcement provided by these institutions. Third-party enforcement is modelled as a costly technology that consumes resources, but permits the punishment of agents who deviate from ex-ante specified allocations. We show that it is optimal to employ the technology whenever commitment problems prevent first-best risk sharing, but never optimal to provide incentives exclusively via this technology. Commitment problems then persist and the optimal incentive structure changes dynamically over time with third-party enforcement monotonically increasing in the relative inequality between agents.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 134 (2007)
Issue (Month): 1 (May)
Pages: 34-60

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Handle: RePEc:eee:jetheo:v:134:y:2007:i:1:p:34-60

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Web page: http://www.elsevier.com/locate/inca/622869

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Cited by:
  1. Thorsten Koeppl & Cyril Monnet & Erwan Quintin, 2008. "Efficient institutions," Working Papers 08-33, Federal Reserve Bank of Philadelphia.
  2. Jonathan Pogach, 2010. "Efficient Auditing and Enforcement in Dynamic Contracts," 2010 Meeting Papers 572, Society for Economic Dynamics.
  3. Thor Koeppl & Cyril Monnet & Erwan Quintin, 2007. "The Poor, the Rich and the Enforcer: Institutional Choice and Growth," Working Papers 1150, Queen's University, Department of Economics.
  4. Thorsten V. Koeppl, 2004. "Risk Sharing through Financial Markets with Endogenous Enforcement of Trades," Econometric Society 2004 North American Winter Meetings 326, Econometric Society.
  5. Xavier Mateos-Planas & Giulio Seccia, 2013. "Consumer Default with Complete Markets: Default-based Pricing and Finite Punishment," Working Papers 711, Queen Mary, University of London, School of Economics and Finance.
  6. Beth Allen, 2006. "Market games with asymmetric information: the core," Economic Theory, Springer, vol. 29(2), pages 465-487, October.
  7. Thorsten Koeppl & Cyril Monnet & Erwan Quintin, 2014. "Efficient contract enforcement," Economic Theory, Springer, vol. 55(1), pages 161-183, January.
  8. Xiao, Tiaojun & Yang, Danqin, 2009. "Risk sharing and information revelation mechanism of a one-manufacturer and one-retailer supply chain facing an integrated competitor," European Journal of Operational Research, Elsevier, vol. 196(3), pages 1076-1085, August.
  9. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.

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