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Efficient Bilateral Risk Sharing Without Commitment

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  • Narayana Kocherlakota

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

Abstract

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

Suggested Citation

  • Narayana Kocherlakota, 1993. "Efficient Bilateral Risk Sharing Without Commitment," Macroeconomics 9311001, University Library of Munich, Germany.
    • 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

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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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