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Sharing Risk Efficiently under Suboptimal Punishments for Defection

Listed author(s):
  • Drew Saunders

The paper studies efficient risk sharing under limited enforcement (or "limited commitment") constraints determined by the threat of punishment after misbehavior. As in Kocherlakota (1996), I assume that society chooses from among those allocations implementable in subgame perfect equilibrium. Rather than assume that punishments implement the least desirable continuation equilibrium, I allow that punishments may be suboptimally specified from the point of view of enforcement. I characterize (up to a technical condition) the set of allocations that may be interpreted as efficient subject to enforcement by some punishment. The conditions rationalizing such efficiency are very weak; they are (i) resource exhaustion, (ii) satisfaction of individual rationality constraints at each continuation, and (iii) fniteness of the value of the allocation under the implicit decentralizing price system, the "high implied interest rates" condition of Alvarez and Jermann (2000). I show that efficient allocations may be decentralized and I state versions of the Welfare Theorems for my environment.

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File URL: http://www.krannert.purdue.edu/programs/phd/Working-papers-series/2007/1203.pdf
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Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1203.

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Length: 38 pages
Date of creation: Aug 2007
Handle: RePEc:pur:prukra:1203
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Web page: http://www.krannert.purdue.edu/programs/phd

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  1. Robert M. Townsend, "undated". "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  2. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
  3. Hanno Lustig, 2001. "The Market Price of Aggregate Risk and the Wealth Distribution," Finance 0111004, EconWPA, revised 16 Nov 2001.
  4. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
  5. Patrick J. Kehoe & Fabrizio Perri, 2002. "Competitive equilibria with limited enforcement," Working Papers 621, Federal Reserve Bank of Minneapolis.
  6. Evans, Robert & Maskin, Eric, 1989. "Efficient renegotiation--proof equilibria in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 361-369, December.
  7. Nelson, J.A., 1993. "On Testing for Full Insurance Using Consumer Expenditures Survey Data," Papers 93-02, California Davis - Institute of Governmental Affairs.
  8. Hanno Lustig & Stijn Van Nieuwerburgh, 2003. "Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perpective," NBER Working Papers 9959, National Bureau of Economic Research, Inc.
  9. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-396, March.
  10. Nelson, Julie A, 1994. "On Testing for Full Insurance Using Consumer Expenditure Survey Data: Comment," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 384-394, April.
  11. Jesus Fernandez-Villaverde & Dirk Krueger, 2004. "Consumption and Saving over the Life Cycle: How Important are Consumer Durables?," 2004 Meeting Papers 357b, Society for Economic Dynamics.
  12. Karsten Jeske, 2006. "Private International Debt with Risk of Repudiation," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 576-593, June.
  13. Patrick J. Kehoe & Fabrizio Perri, 2000. "International Business Cycles with Endogenous Incomplete Markets," NBER Working Papers 7870, National Bureau of Economic Research, Inc.
  14. Altug, Sumru & Miller, Robert A, 1990. "Household Choices in Equilibrium," Econometrica, Econometric Society, vol. 58(3), pages 543-570, May.
  15. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-294, March.
  16. Timothy J. Kehoe & David K. Levine, 1992. "Debt constrained asset markets," Working Papers 445, Federal Reserve Bank of Minneapolis.
  17. Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
  18. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-956, October.
  19. Ham, John C & Jacobs, Kris, 2000. "Testing for Full Insurance Using Exogenous Information," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(4), pages 387-397, October.
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