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Non-commitment and savings in dynamic risk-sharing contracts

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  • Karine Gobert

    ()

  • Michel Poitevin

    ()

Abstract

We characterize the solution to a dynamic model of risk sharing under non-commitment when saving is possible. Savings can play two important roles. First savings can be used to smooth aggregate consumption across different periods. Second, when savings are observable, they can act as a collateral that can be seized in the case of default. This relaxes the non-commitment constraint. When the aggregate income is fixed or when one of the agent is risk neutral, the allocation tends to first-best consumption. When one of the agent is risk neutral, this convergence occurs in an expected finite number of periods. Copyright Springer-Verlag Berlin/Heidelberg 2006

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File URL: http://hdl.handle.net/10.1007/s00199-005-0624-7
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 28 (2006)
Issue (Month): 2 (06)
Pages: 357-372

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Handle: RePEc:spr:joecth:v:28:y:2006:i:2:p:357-372

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Related research

Keywords: Dynamic contracts; Risk sharing; Non-commitment; Savings.;

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References

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  1. Milton Harris & Bengt Holmstrom, 1981. "A Theory of Wage Dynamics," Discussion Papers 488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  3. Pischke, J., 1992. "Individual Income, Incomplete Information, and Aggregate Consumption," Discussion Paper 1992-38, Tilburg University, Center for Economic Research.
  4. Gauthier, Celine & Poitevin, Michel & Gonzalez, Patrick, 1997. "Ex Ante Payments in Self-Enforcing Risk-Sharing Contracts," Journal of Economic Theory, Elsevier, vol. 76(1), pages 106-144, September.
  5. Ambarish, Ramasastry & John, Kose & Williams, Joseph, 1987. " Efficient Signalling with Dividends and Investments," Journal of Finance, American Finance Association, vol. 42(2), pages 321-43, June.
  6. Geir Asheim & Jon Strand, 1991. "Long-term union-firm contracts," Journal of Economics, Springer, vol. 53(2), pages 161-184, June.
  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. Garcia, R. & Lusardi, A. & Ng, S., 1995. "Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation," Cahiers de recherche 9511, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  9. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
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Citations

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Cited by:
  1. Wahhaj, Zaki, 2010. "Social norms and individual savings in the context of informal insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 511-530, December.
  2. Martin Boyer & Karine Gobert, 2007. "The Impact of Switching Costs on Vendor Financing," Cahiers de recherche 07-18, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  3. Catarina Reis, 2013. "Taxation without commitment," Economic Theory, Springer, vol. 52(2), pages 565-588, March.
  4. Stefan Dercon & Tessa Bold, 2009. "Contract Design in Insurance Groups," Economics Series Working Papers 421, University of Oxford, Department of Economics.
  5. M. Peiris & Alexandros Vardoulakis, 2013. "Savings and default," Economic Theory, Springer, vol. 54(1), pages 153-180, September.
  6. Karine Gobert, 2001. "Capital Structure and Risk Management," CIRANO Working Papers 2001s-51, CIRANO.
  7. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2000. "Mutual Insurance, Individual Savings and Limited Commitment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(2), pages 216-246, April.
  8. Dubois, Pierre, 2002. "Consommation, partage de risque et assurance informelle : développements théoriques et tests empiriques récents," L'Actualité Economique, Société Canadienne de Science Economique, vol. 78(1), pages 115-149, Mars.

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