Optimal dynamic risk sharing when enforcement is a decision variable
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.(This abstract was borrowed from another version of this item.)
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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
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622869
Related research
Keywords:Other versions of this item:
- Thorsten V. Koeppl, 2003. "Optimal dynamic risk sharing when enforcement is a decision variable," Working Paper Series 282, European Central Bank.
- Thorsten Koeppl, 2005. "Optimal Dynamic Risk Sharing when Enforcement is a Decision Variable," Working Papers 1050, Queen's University, Department of Economics.
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D60 - Microeconomics - - Welfare Economics - - - General
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- K49 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Other
References
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Thorsten V. Köppl, 2004.
"Risk sharing through financial markets with endogenous enforcement of trades,"
Working Paper Series
319, European Central Bank.
- Koppl, Thorsten V., 2006. "Risk sharing through financial markets with endogenous enforcement of trades," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 1987-2014, November.
- Thorsten V. Koeppl, 2004. "Risk Sharing through Financial Markets with Endogenous Enforcement of Trades," Econometric Society 2004 North American Winter Meetings 326, Econometric Society.
- Thorsten Koeppl, 2004. "Risk Sharing through Financial Markets with Endogenous Enforcement of Trades," Working Papers 1048, Queen's University, Department of Economics.
- 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.
- Erwan Quintin & Cyril Monnet & Thorsten Koeppl, 2008. "The Poor, the Rich and the Enforcer: Institutional Choice and Growth," 2008 Meeting Papers 281, Society for Economic Dynamics.
- Erwan Quintin & Thorsten Koeppl & Cyril Monnet, 2008. "The poor, the rich and the enforcer: institutional choice and growth," Working Papers 0801, Federal Reserve Bank of Dallas.
- Guido Ascari & Neil Rankin, 2004.
"Perpetual youth and endogenous labour supply: a problem and a possible solution,"
Working Paper Series
346, European Central Bank.
- 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.
- Beth Allen, 2006. "Market games with asymmetric information: the core," Economic Theory, Springer, vol. 29(2), pages 465-487, October.
- Jonathan Pogach, 2010. "Efficient Auditing and Enforcement in Dynamic Contracts," 2010 Meeting Papers 572, Society for Economic Dynamics.
- Thorsten Koeppl & Cyril Monnet & Erwan Quintin, 2008. "Efficient institutions," Working Papers 08-33, Federal Reserve Bank of Philadelphia.
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