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Efficient Bilateral Risk Sharing Without Commitment


  • Narayana Kocherlakota

    (Economics; Univ. of Iowa; Iowa City, Iowa 52242; USA)


This paper examines the properties of efficient sustainable allocations in an environment in which two agents want to share risk, have perfect information about each other, but cannot make commitments about future transfers. I describe as sustainable any allocation that can be supported as a subgame perfect equilibrium in a game in which individuals make simultaneous transfers. I consider the properties of efficient sustainable allocations. There are three main findings. First, if some first best allocation is sustainable, then any efficient allocation must converge with probability one to a first best allocation. In the long run, the lack of commitment is irrelevant. Second, if no first best allocation is sustainable, then the unconditional probability distribution of an agent's utility and consumption converge weakly over time to a nondegenerate distribution. Finally, under any conditions, the conditional contemporaneous covariance of individual income and

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  • Narayana Kocherlakota, 1993. "Efficient Bilateral Risk Sharing Without Commitment," Macroeconomics 9311001, EconWPA.
  • Handle: RePEc:wpa:wuwpma:9311001 Note: Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 1 file -- risksh (body in WP5.1, 42 pages)

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    References listed on IDEAS

    1. Lucas, Deborah J., 1994. "Asset pricing with undiversifiable income risk and short sales constraints: Deepening the equity premium puzzle," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 325-341, December.
    2. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-396, March.
    3. Andrew Atkeson & Robert E. Lucas, 1992. "On Efficient Distribution With Private Information," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 427-453.
    4. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.
    5. Marcet, Albert & Marimon, Ramon, 1992. "Communication, commitment, and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 219-249, December.
    6. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August.
    7. 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.
    8. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
    9. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
    10. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
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    Cited by:

    1. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.

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    JEL classification:

    • E - Macroeconomics and Monetary Economics


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