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Non-Commitment and Savings in Dynamic Risk-Sharing Contracts

  • 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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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
Date of revision:
Handle: RePEc:mtl:montde:9806
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  1. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
  2. 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.
  3. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  4. Ambarish, Ramasastry & John, Kose & Williams, Joseph, 1987. " Efficient Signalling with Dividends and Investments," Journal of Finance, American Finance Association, vol. 42(2), pages 321-43, June.
  5. René Garcia & Serena Ng & Annamaria Lusardi, 1995. "Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation," CIRANO Working Papers 95s-09, CIRANO.
  6. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  7. Pischke, Jörn-Steffen, 1991. "Individual income, incomplete information, and aggregate consumption," ZEW Discussion Papers 91-07, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  8. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  9. Milton Harris & Bengt Holmstrom, 1981. "A Theory of Wage Dynamics," Discussion Papers 488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Asheim, G.B. & Strand, J., 1989. "Long-Term Union-Firm Contracts," Papers 10-89, Norwegian School of Economics and Business Administration-.
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