Competitive Risk Sharing Contracts with One-Sided Commitment

Dirk Krüger and Harald Uhlig ()
Authors registered in the RePEc Author Service: Dirk Krueger ()

No 4208, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex-ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex-post. In any given period, after having observed their income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. Contrary to intuition, we demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment effectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogo (1989). From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved.

Keywords: competition; limited commitment; long-term contracts; risk sharing (search for similar items in EconPapers)
JEL-codes: D11 D91 E21 G22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2004-01
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Related works:
Working Paper: Competitive Risk Sharing Contracts with One-Sided Commitment (2003)
Working Paper: Competitive Risk Sharing Contracts with One-Sided Commitment (2005)
Working Paper: Competitive Risk Sharing Contracts with One-Sided Commitment (2003)
Working Paper: Competitive Risk Sharing Contracts with One-Sided Commitment (2005)
Journal Article: Competitive risk sharing contracts with one-sided commitment (2006)
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