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Non-Commitment and Savings in Dynamic Risk-Sharing Contracts

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  • GOBERT, Karine
  • POITEVIN, Michel

Abstract

We characterize the solution to a model of consumption smoothing using financing under non-commitment and savings. We show that, under certain conditions, these two different instruments complement each other perfectly. If the rate of time preference is equal to the interest rate on savings, perfect smoothing can be achieved in finite time. We also show that, when random revenues are generated by periodic investments in capital through a concave production function, the level of smoothing achieved through financial contracts can influence the productive investment efficiency. As long as financial contracts cannot achieve perfect smoothing, productive investment will be used as a complementary smoothing device.

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File URL: http://hdl.handle.net/1866/456
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Bibliographic Info

Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 9806.

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Length: 28 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:mtl:montde:9806

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Keywords: savings; consumion; dynamic risk sharing; non-commitment;

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References

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  1. Garcia, R. & Lusardi, A. & Ng, S., 1995. "Excess Sensitivity and Asymmetries in Consumption: an Empirical Investigation," Cahiers de recherche 9511, Universite de Montreal, Departement de sciences economiques.
  2. Pischke, Jorn-Steffen, 1995. "Individual Income, Incomplete Information, and Aggregate Consumption," Econometrica, Econometric Society, vol. 63(4), pages 805-40, July.
  3. 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.
  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. 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.
  6. Asheim, G.B. & Strand, J., 1989. "Long-Term Union-Firm Contracts," Memorandum 08/1989, Oslo University, Department of Economics.
  7. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  8. 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.
  9. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  10. 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, M. & Gobert, Karine, 2009. "The impact of switching costs on vendor financing," Finance Research Letters, Elsevier, vol. 6(4), pages 236-241, December.
  3. Stefan Dercon & Tessa Bold, 2009. "Contract Design in Insurance Groups," Economics Series Working Papers 421, University of Oxford, Department of Economics.
  4. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 1998. "Mutual Insurance, Individual Savings and Limited Commitment," Keele Department of Economics Discussion Papers (1995-2001) 98/14, Department of Economics, Keele University.
  5. M. Peiris & Alexandros Vardoulakis, 2013. "Savings and default," Economic Theory, Springer, vol. 54(1), pages 153-180, September.
  6. 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.
  7. Reis, Catarina, 2006. "Taxation without Commitment," MPRA Paper 2071, University Library of Munich, Germany.
  8. Karine Gobert, 2001. "Capital Structure and Risk Management," CIRANO Working Papers 2001s-51, CIRANO.

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