This paper examines the effects of income inequality in a risk sharing model with limited commitment, that is, when insurance agreements have to be self-enforcing. In this context, numerical dynamic programming is used to examine three questions. First, I consider heterogeneity in mean income, and study the welfare effects when inequality together with aggregate income increases. Second, subsistence consumption is introduced to see how it affects consumption smoothing. Finally, income is endogenized by allowing households to choose between two production technologies, to look at the importance of consumption insurance for income smoothing.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
7197.
Find related papers by JEL classification: I30 - Health, Education, and Welfare - - Welfare and Poverty - - - General D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
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