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Implications of Efficient Risk Sharing Without Commitment


  • Narayana Kocherlakota


Consumption data generally indicates that consumption risk is not perfectly diversified across individuals. This paper considers if and when imperfect diversification is a feature of efficient allocations in a symmetric information environment without commitment. It shows that if individuals are sufficiently patient, imperfect diversification is always sub-optimal in the long run; however, if individuals are not so patient, imperfect diversification is always optimal. The paper goes on to demonstrate that the way that history matters in an efficient allocation in a symmetric-information/no-commitment environment can be used to distinguish lack of commitment from other possible rationalizations of imperfect risk sharing, such as efficiency in the presence of asymmetric information.
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  • Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
  • Handle: RePEc:cla:levarc:2053

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