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

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  • Gauthier, C.
  • Poitevin, M.

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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Suggested Citation

  • Gauthier, C. & Poitevin, M., 1994. "Using Ex-ante Payments in Self-Enforcing Risk-Sharing Contracts," Cahiers de recherche 9402, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    • Handle: RePEc:mtl:montec:9402
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    References listed on IDEAS

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    1. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 541-554.
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    5. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
    6. 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.
    7. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(3), pages 315-333.
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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," Econometrica, Econometric Society, vol. 76(4), pages 679-725, July.
    2. Ambec, Stefan & Dinar, Ariel & McKinney, Daene, 2013. "Water sharing agreements sustainable to reduced flows," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 639-655.
    3. Ansink, Erik & Houba, Harold, 2016. "Sustainable agreements on stochastic river flow," Resource and Energy Economics, Elsevier, vol. 44(C), pages 92-117.
    4. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 1997. "Informal Insurance Arrangements in Village Economies," Keele Department of Economics Discussion Papers (1995-2001) 97/08, Department of Economics, Keele University, revised Oct 2000.
    5. Kocherlakota, Narayana R., 1996. "Consumption, commitment, and cycles," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 461-474, June.

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    More about this item

    Keywords

    RISK; CONTRACTS;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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