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Non-commitment and savings in dynamic risk-sharing contracts

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  • Karine Gobert

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  • Michel Poitevin

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Abstract

We characterize the solution to a dynamic model of risk sharing under non-commitment when saving is possible. Savings can play two important roles. First savings can be used to smooth aggregate consumption across different periods. Second, when savings are observable, they can act as a collateral that can be seized in the case of default. This relaxes the non-commitment constraint. When the aggregate income is fixed or when one of the agent is risk neutral, the allocation tends to first-best consumption. When one of the agent is risk neutral, this convergence occurs in an expected finite number of periods. Copyright Springer-Verlag Berlin/Heidelberg 2006

Suggested Citation

  • Karine Gobert & Michel Poitevin, 2006. "Non-commitment and savings in dynamic risk-sharing contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(2), pages 357-372, June.
  • Handle: RePEc:spr:joecth:v:28:y:2006:i:2:p:357-372 DOI: 10.1007/s00199-005-0624-7
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    References listed on IDEAS

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    Cited by:

    1. Tessa Bold & Stefan Dercon, 2009. "Contract Design in Insurance Groups," CSAE Working Paper Series 2009-04, Centre for the Study of African Economies, University of Oxford.
    2. Wahhaj, Zaki, 2010. "Social norms and individual savings in the context of informal insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 511-530, December.
    3. Catarina Reis, 2013. "Taxation without commitment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 565-588.
    4. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2000. "Mutual Insurance, Individual Savings and Limited Commitment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(2), pages 216-246, April.
    5. Cheng Wang, 2005. "Dynamic costly state verification," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(4), pages 887-916, June.
    6. Martin Boyer, M. & Gobert, Karine, 2009. "The impact of switching costs on vendor financing," Finance Research Letters, Elsevier, vol. 6(4), pages 236-241, December.
    7. Dubois, Pierre, 2002. "Consommation, partage de risque et assurance informelle : développements théoriques et tests empiriques récents," L'Actualité Economique, Société Canadienne de Science Economique, vol. 78(1), pages 115-149, Mars.
    8. Karine Gobert, 2001. "Capital Structure and Risk Management," CIRANO Working Papers 2001s-51, CIRANO.
    9. M. Peiris & Alexandros Vardoulakis, 2013. "Savings and default," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 153-180.

    More about this item

    Keywords

    Dynamic contracts; Risk sharing; Non-commitment; Savings.;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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