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Mutual Insurance, Individual Savings and Limited Commitment

  • Ethan Ligon
  • Jonathan P. Thomas
  • Tim Worrall

This paper examines a dynamic model of mutual insurance when households can also engage in self-insurance by storage. This mutual insurance is informal as it is assumed that there is no enforcement mechanism, so any mutual insurance arrangements must be self-enforcing. It is shown how consumption allocations satisfy a modified Euler condition and that an enhanced storage technology can either raise or diminish welfare. Furthermore it is shown that the ex ante transfers introduced into dynamic informal insurance models recently by Gauthier, Poitevin, and Gonz´alez (1997) are only used here in the first period, with the role of ex ante transfers being replaced by differential individual storage.

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File URL: http://www.keele.ac.uk/depts/ec/wpapers/9814.pdf
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Paper provided by Department of Economics, Keele University in its series Keele Department of Economics Discussion Papers (1995-2001) with number 98/14.

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Date of creation: 1998
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Publication status: Published in Review of Economic Dynamics, Vol. 3(2), April 2000, pages 216-246.
Handle: RePEc:kee:keeldp:98/14
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Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom

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Order Information: Postal: Department of Economics, Keele University, Keele, Staffordshire ST5 5BG - United Kingdom
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  1. Gauthier, Celine & Poitevin, Michel & Gonzalez, Patrick, 1997. "Ex Ante Payments in Self-Enforcing Risk-Sharing Contracts," Journal of Economic Theory, Elsevier, vol. 76(1), pages 106-144, September.
  2. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
  3. Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
  4. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  5. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Papers 411, Stockholm - International Economic Studies.
  6. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
  7. 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, 06.
  8. Andrew D. Foster & Mark R. Rosenzweig, 2001. "Imperfect Commitment, Altruism, And The Family: Evidence From Transfer Behavior In Low-Income Rural Areas," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 389-407, August.
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