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Implications of Endogenous Group Formation for Efficient Risk-Sharing

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  • Tessa Bold

Abstract

The existing literature on sub-game perfect risk-sharing suffers from a basic inconsistency. While a group of size "n" is able to coordinate on a risk-sharing outcome, it is assumed that deviating subgroups cannot. I relax this assumption and characterise the optimal contract among all coalition-proof history-dependent contracts. This alters the predictions of the standard dynamic limited commitment model. I show that the consumption of constrained agents depends on both the history of shocks and its interaction with the current income of other constrained agents. From this, I derive a formal test for the presence of endogenous group formation under limited commitment. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

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  • Tessa Bold, 2009. "Implications of Endogenous Group Formation for Efficient Risk-Sharing," Economic Journal, Royal Economic Society, vol. 119(536), pages 562-591, March.
  • Handle: RePEc:ecj:econjl:v:119:y:2009:i:536:p:562-591
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    Cited by:

    1. Jaramillo, Fernando & Kempf, Hubert & Moizeau, Fabien, 2015. "Heterogeneity and the formation of risk-sharing coalitions," Journal of Development Economics, Elsevier, vol. 114(C), pages 79-96.
    2. Ethan Ligon & Pierre Dubois, 2012. "Incentives & Nutrition for Rotten Kids: The Quantity & Quality of Food Allocated within Philippine Households," 2012 Meeting Papers 375, Society for Economic Dynamics.
    3. Parantap Basu & Sigit Sulistiyo Wibowo, 2015. "An Empirical Investigation of Risk Sharing among Indonesian Households," CEGAP Working Papers 2015_02, Durham University Business School.
    4. Emla Fitzsimons & Bansi Malde & Marcos Vera-Hernandez, 2015. "Group size and the efficiency of informal risk sharing," IFS Working Papers W15/31, Institute for Fiscal Studies.
    5. Michail Anthropelos, 2012. "The Effect of Market Power on Risk-Sharing," Papers 1206.0384, arXiv.org, revised May 2016.
    6. Tobias Broer & Tessa Bold, 2015. "Risk-Sharing in Village Economies Revisited," 2015 Meeting Papers 1232, Society for Economic Dynamics.
    7. Xiao Yu Wang, 2014. "Risk Sorting, Portfolio Choice, and Endogenous Informal Insurance," NBER Working Papers 20429, National Bureau of Economic Research, Inc.

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