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Stable risk-sharing

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  • Dutta, Jayasri
  • Prasad, Kislaya

Abstract

We evaluate the stability of risk-sharing contracts in the presence of moral hazard. Contracts are rules for sharing output among producers and affect the extent of private investments in production. Organizations, which are identified with the contracts they offer, compete for membership. Equilibrium displays co-ordination failure because potentially efficient contracts can fail to attract participants. We consider an environment where participants experiment, or make some mistakes in their choice and apply methods of evolutionary stability. We identify stable contracts, which survive competition against any other. Stable contracts need not be efficient. In addition to theoretical results, we use computational methods to examine two kinds of problems. First, we investigate the properties of the efficient and stable contracts. Second we simulate the evolution of organizations to examine behavior in the presence of small, positive amounts of noise.
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Suggested Citation

  • Dutta, Jayasri & Prasad, Kislaya, 2002. "Stable risk-sharing," Journal of Mathematical Economics, Elsevier, vol. 38(4), pages 411-439, December.
    • Handle: RePEc:eee:mateco:v:38:y:2002:i:4:p:411-439
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    Cited by:

    1. Kevin Hasker, 2014. "The Emergent Seed: A Representation Theorem for Models of Stochastic Evolution and two formulas for Waiting Time," Levine's Working Paper Archive 786969000000000954, David K. Levine.
    2. Mary A. Burke & Kislaya Prasad, 2005. "Contracts with social multipliers," Working Papers 05-17, Federal Reserve Bank of Boston.

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    More about this item

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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