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Risk sharing contracts with private information and one-sided commitment

Author

Listed:
  • Eduardo Zilberman

    (Central Bank of Chile)

  • Vinicius Carrasco

    (PUC-Rio)

  • Pedro Hemsley

    (UERJ)

Abstract

In a repeated unobserved endowment economy in which agents negotiate long-term contracts with a financial intermediary, we study the risk sharing implications of the interaction between incentive compatibility constraints (due to private information) and participation constraints (due to one-sided commitment). In particular, we assume that after a default episode, agents consume their endowment and remain in autarky forever. We find that once they are away from autarky today, if the probability of drawing the highest possible endowment shock is sufficiently small, the optimal contract prevents agents from reaching autarky tomorrow and, thus, from being “impoverished.” Moreover, an invariant cross-sectional distribution of lifetime utilities (or values) exists. A numerical example shows that the mass of agents living in autarky can be zero in the limit.

Suggested Citation

  • Eduardo Zilberman & Vinicius Carrasco & Pedro Hemsley, 2019. "Risk sharing contracts with private information and one-sided commitment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(1), pages 53-81, July.
    • Handle: RePEc:spr:joecth:v:68:y:2019:i:1:d:10.1007_s00199-018-1112-1
    DOI: 10.1007/s00199-018-1112-1
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    References listed on IDEAS

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    Cited by:

    1. Grochulski, Borys & Zhang, Yuzhe, 2023. "Termination as an incentive device," Theoretical Economics, Econometric Society, vol. 18(1), January.

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    More about this item

    Keywords

    Risk sharing contracts; private information; One-sided commitment;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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