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Non-Commitment and Savings in Dynamic Risk-Sharing Contracts

Listed author(s):
  • GOBERT, Karine
  • POITEVIN, Michel

We characterize the solution to a model of consumption smoothing using financing under non-commitment and savings. We show that, under certain conditions, these two different instruments complement each other perfectly. If the rate of time preference is equal to the interest rate on savings, perfect smoothing can be achieved in finite time. We also show that, when random revenues are generated by periodic investments in capital through a concave production function, the level of smoothing achieved through financial contracts can influence the productive investment efficiency. As long as financial contracts cannot achieve perfect smoothing, productive investment will be used as a complementary smoothing device.

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File URL: http://hdl.handle.net/1866/456
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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 9806.

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Length: 28 pages
Date of creation: 1998
Handle: RePEc:mtl:montde:9806
Contact details of provider: Postal:
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Phone: (514) 343-6540
Fax: (514) 343-5831
Web page: http://www.sceco.umontreal.ca

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  1. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  2. Garcia, Rene & Lusardi, Annamaria & Ng, Serena, 1997. "Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 154-176, May.
  3. Jorn-Steffen Pischke, 1991. "Individual Income, Incomplete Information and Aggregate Consumption," Working Papers 669, Princeton University, Department of Economics, Industrial Relations Section..
  4. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 599-617.
  5. Asheim, G.B. & Strand, J., 1989. "Long-Term Union-Firm Contracts," Papers 10-89, Norwegian School of Economics and Business Administration-.
  6. 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.
  7. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
  8. Ambarish, Ramasastry & John, Kose & Williams, Joseph, 1987. " Efficient Signalling with Dividends and Investments," Journal of Finance, American Finance Association, vol. 42(2), pages 321-343, June.
  9. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
  10. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 315-333.
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