Dynamic Risk Sharing With Private Information and Costly Verification of Storage

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Dynamic Risk Sharing With Private Information and Costly Verification of Storage

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Urs Haegler () (Department of Economics, Royal Holloway, University of London)

Abstract

This paper studies the role of dynamic risk sharing in a world where agents have private information about their incomes, and in which their storage activities can be monitored at a cost. A principal offers long-term, full-commitment contracts to the agents, promising them consumption smoothing to some extent, as well as insurance against low incomes. The study examines the choice of optimal reporting and verification strategies and their effect on the efficiency of the contracts. The main results are that allowing for costly verifiability of storage may enable the principal to offer income-contingent transfer schemes that are Pareto-superior to pure borrowing and lending, and that only agents reporting very low incomes may be investigated.

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Paper provided by Department of Economics, Royal Holloway University of London in its series Royal Holloway, University of London: Discussion Papers in Economics with number 99/3.

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Length: 33 pages
Date of creation: Nov 1999
Date of revision: Nov 1999
Handle: RePEc:hol:holodi:9903

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This paper has been announced in the following NEP Reports:

NEP-ALL-2001-06-14 (All new papers)
NEP-REG-2001-06-14 (Regulation)

References listed on IDEAS
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Harold L. Cole & Narayana R. Kocherlakota, 1999. "Efficient allocations with hidden income and hidden storage," Staff Report 238, Federal Reserve Bank of Minneapolis. [Downloadable!]
Other versions:
- Cole, Harold L & Kocherlakota, Narayana R, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," Review of Economic Studies, Blackwell Publishing, vol. 68(3), pages 523-42, July.
Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Blackwell Publishing, vol. 59(3), pages 427-53, July. [Downloadable!] (restricted)
Edward J. Green & Soo-Nam Oh, 1991. "Can a "credit crunch" be efficient?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-17. [Downloadable!]
Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May. [Downloadable!] (restricted)

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