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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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Paper provided by EconWPA in its series Macroeconomics with number 9311001.

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Length: 42 pages
Date of creation: 01 Nov 1993
Date of revision:
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)
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Working papers 8813, Wisconsin Madison - Social Systems.
  2. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
  3. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  4. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August.
  5. 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.
  6. 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.
  7. Marcet, Albert & Marimon, Ramon, 1992. "Communication, commitment, and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 219-249, December.
  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, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
  10. 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.
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