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Risk Sharing and the Dynamics of Inequality

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  • Ezra Friedman

Abstract

Risk averse agents who engage in risky production activities frequently participate in some sort of arrangement to share risk. When there are issues of moral hazard, optimal risk sharing typically involves spreading risk over time as well as over space. Agents who suffer bad outcomes can spread risk over time by borrowing against future earnings to supplement present consumption. In this paper I analyze the effect that such intertemporal risk sharing has on the distribution of consumption and utility. I find that in most cases intertemporal risk sharing leads to a spreading of the utility weight distribution. Under the optimal contract agents who suffer negative shocks respond by working harder and bearing more risk, exposing them to the likelihood of more negative shocks.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1235.

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Date of creation: Nov 1998
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Handle: RePEc:nwu:cmsems:1235

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Cited by:
  1. Mele, Antonio, 2010. "Repeated moral hazard and recursive Lagrangeans," MPRA Paper 21741, University Library of Munich, Germany.
  2. Ramon Marimon, 2011. "New Results in Recursive Contract Theory," 2011 Meeting Papers 752, Society for Economic Dynamics.
  3. Matthias Messner & Nicola Pavoni, 2004. "On the Recursive Saddle Point Method," Levine's Bibliography 122247000000000050, UCLA Department of Economics.

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