Implications of Endogenous Group Formation for Efficient Risk-Sharing
AbstractThis paper models the implications of endogenous group formation for efficient risk-sharing contracts in the dynamic limited commitment model.� Endogenising group formation requires that any risk-sharing arrangement is not only stable with respect to individual deviations but also with respect to deviations by sub-groups.� This requirement alters the central predictions of the dynamic limited commitment model for efficient bilateral risk-sharing.� Firstly, consumption of constrained agents depends on the previous history of shocks and the interaction of the history of shocks with the current income realizations of other constrained agents.� As a consequence, the efficient contract does not display amnesia.� Secondly, the covariance between current consumption and past income can take on negative values.� Based on the first result, we derive a formal test for the presence of endogenous group formation under limited commitment.� In addition, we show how this test can be extended to distinguish a limited commitment/perfect information environment from a full commitment/imperfect information environment empirically.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 387.
Date of creation: 01 Feb 2008
Date of revision:
Risk-Sharing; Limited Commitment; Endogenous Group Formation;
Find related papers by JEL classification:
- D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-25 (All new papers)
- NEP-BEC-2008-03-25 (Business Economics)
- NEP-GTH-2008-03-25 (Game Theory)
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