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Using Ex Ante Payments in Self-Enforcing Risk-Sharing Contracts

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  • Céline Gauthier
  • Michel Poitevin

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Abstract

In this paper we analyze a long-term risk-sharing contract between two risk-averse agents facing self-enforcing constraints. We enlarge the contracting space to allow for an ex ante transfer (at the beginning of the period) before the state of nature is realized. We analyze the trade-off between the self-enforcing constraints of the two agents by characterizing the optimal ex ante and ex post transfer payments. We show that optimal ex ante payments are non-stationary. They optimally depend on the surplus from the relationship each agent expects. The size of the ex ante payment an agent makes is inversely related to its expected surplus from the relationship. The introduction of ex ante payments generates interesting dynamic properties. In a two-state example with i.i.d. shocks, the dynamics of the optimal contract exhibit experience rating even though there is no private information or learning taking place. Ce papier analyse les propriétés dynamiques d'un contrat de partage de risque entre deux agents riscophobes qui font face à des contraintes de faillite. L'espace des contrats est élargi pour permettre aux agents d'effectuer un transfert au début de chacune des périodes avant la réalisation de l'incertitude. Ces paiements ex ante ne sont pas stationnaires. Ils dépendent du surplus que chaque agent attend de la relation. Ce paiement est inversement proportionnel à ce surplus. Dans un environnement i.i.d. à deux états de la nature, les propriétés dynamiques de la consommation de chacun des agents démontrent un lissage qui ressemble à de la tarification a posteriori.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 95s-02.

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Date of creation: 01 Jan 1995
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Handle: RePEc:cir:cirwor:95s-02

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Keywords: Risk sharing; Dynamic relationship; Self enforcing contracts; Partage de risque ; Relation dynamique ; Contrats auto-exécutoires;

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References

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  1. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
  2. Phelan, Christopher & Townsend, Robert M, 1991. "Computing Multi-period, Information-Constrained Optima," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 853-81, October.
  3. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
  4. Milton Harris & Bengt Holmstrom, 1981. "A Theory of Wage Dynamics," Discussion Papers 488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
  6. Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-32, May.
  7. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
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Cited by:
  1. Pierre Dubois & Bruno Jullien & Thierry Magnac, 2008. "Formal and informal risk sharing in LDCs: theory and empirical evidence," Working Papers 25314, Institut National de la Recherche Agronomique, France.
  2. Kocherlakota, Narayana R., 1996. "Consumption, commitment, and cycles," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 461-474, June.

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