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Efficient Risk Sharing with Limited Commitment and Storage

Abraham, A and Laczo, S (2016) Efficient Risk Sharing with Limited Commitment and Storage [Working Paper]

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Abstract

We extend the model of risk sharing with limited commitment (Kocherlakota, 1996) by introducing both a public and a private (non-contractible and/or non-observable) storage technology. Positive public storage relaxes future participation constraints and may hence improve risk sharing, contrary to the case where hidden income or effort is the deep friction. The characteristics of constrained-efficient allocations crucially depend on the storage technology’s return. In the long run, if the return on storage is (i) moderately high, both assets and the consumption distribution may remain time-varying; (ii) sufficiently high, assets converge almost surely to a constant and the consumption distribution is time-invariant; (iii) equal to agents’ discount rate, perfect risk sharing is self-enforcing. Agents never have an incentive to use their private storage technology, i.e., Euler inequalities are always satisfied, at the constrained-efficient allocation of our model, while this is not the case without optimal public asset accumulation.

Item Type: Working Paper
Subjects : Economics
Divisions : Faculty of Arts and Social Sciences > School of Economics
Authors :
NameEmailORCID
Abraham, AUNSPECIFIEDUNSPECIFIED
Laczo, SUNSPECIFIEDUNSPECIFIED
Date : 2016
Copyright Disclaimer : © Árpád Ábrahám, Sarolta Laczó, 2016. Copyright belongs to the authors. This text may be downloaded for personal research purposes only. Any additional reproduction for other purposes, whether in hard copy or electronically, requires the consent of the author(s), editor(s). If cited or quoted, reference should be made to the full name of the author(s), editor(s), the title, the working paper or other series, the year, and the publisher.
Uncontrolled Keywords : Risk sharing, Limited commitment, Hidden storage, Dynamic contracts
Related URLs :
Depositing User : Symplectic Elements
Date Deposited : 20 Oct 2016 08:48
Last Modified : 20 Oct 2016 08:56
URI: http://epubs.surrey.ac.uk/id/eprint/812524

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