IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Allocation of Individual Risks in a Market Economy

  • Pamela Labadie

    ()

    (Department of Economics George Washington University)

The ability to insure against idiosyncratic endowment risk depends on the organization of markets and the availability of consumption insurance. When all agents are identical ex ante and there are complete contingent claims, then full insurance can be achieved. Simple frictions, such as exogenous and endogenous borrowing constraints, liquidity constraints, or one-sided commitment, lead to partial insurance, implying richer dynamics for wealth accumulation and prices, and can potentially improve the asset pricing predictions of consumption-based asset pricing models. Yet, as Constantinides and Duffie point out, incorporating these frictions has not provided much improvement in the empirical performance of the mdoels. They argue for models with ex ante heterogeneity in which consumption insurance is limited. In the model studied here, agents are ex ante heterogeneous because they face different income distribution risks. The allocation of resources across the heterogeneous agents is determined by the formation of endogenous coalitions of agents. The resulting allocations are identical to those achieved by a clearing house announcing state contingent prices that clear markets. The result is that agents only partially insure against endowment risk because any coalition comprised of agents of the same type will be blocked. Despite the differences in endowment distribution risk, agents are not able to purchase contingent claims with prices that are indexed by type, so that full consumption insurance is unavailable. The partial consumption insurance allows for richer dynamics in asset pricing and wealth accumulation

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 672.

as
in new window

Length:
Date of creation: 03 Dec 2006
Date of revision:
Handle: RePEc:red:sed006:672
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htm
Email:


More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed006:672. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.