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Efficient risk sharing with limited commitment and storage

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  • Abraham, Arpad
  • Laczo, Sarolta

Abstract

We extend the model of risk sharing with limited commitment (Kocherlakota, 1996) by introducing both a public and a private (non-contractible and/or non-observable) storage technology. Positive public storage relaxes future participation constraints and may hence improve risk sharing, contrary to the case where hidden income or effort is the deep friction. The characteristics of constrained-efficient allocations crucially depend on the storage technology’s return. In the long run, if the return on storage is (i) moderately high, both assets and the consumption distribution may remain time-varying; (ii) sufficiently high, assets converge almost surely to a constant and the consumption distribution is time-invariant; (iii) equal to agents’ discount rate, perfect risk sharing is self-enforcing. Agents never have an incentive to use their private storage technology, i.e., Euler inequalities are always satisfied, at the constrained-efficient allocation of our model, while this is not the case without optimal public asset accumulation.

Suggested Citation

  • Abraham, Arpad & Laczo, Sarolta, 2014. "Efficient risk sharing with limited commitment and storage," Economics Working Papers ECO2014/11, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2014/11
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    References listed on IDEAS

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    1. Efficient Risk Sharing with Limited Commitment and Storage
      by Christian Zimmermann in NEP-DGE blog on 2013-07-14 08:58:49

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    3. Miyazaki, Koichi, 2019. "Optimal paid job-protected leave policy," MPRA Paper 96223, University Library of Munich, Germany.
    4. Bredemeier, Christian & Gravert, Jan & Juessen, Falko, 2021. "Accounting for Limited Commitment between Spouses When Estimating Labor-Supply Elasticities," IZA Discussion Papers 14226, Institute of Labor Economics (IZA).
    5. Thomas, Jonathan P. & Worrall, Tim, 2018. "Dynamic relational contracts under complete information," Journal of Economic Theory, Elsevier, vol. 175(C), pages 624-651.
    6. Li, Zhimin & Ligon, Ethan, 2020. "Inferring informal risk-sharing regimes: Evidence from rural Tanzania," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 941-955.
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    8. Miyazaki, Koichi, 2021. "A theory of optimal paid parental leave policies," MPRA Paper 109035, University Library of Munich, Germany.
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    More about this item

    Keywords

    Risk sharing; Limited commitment; Hidden storage; Dynamic contracts;
    All these keywords.

    JEL classification:

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

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