Optimal Dynamic Risk Sharing when Enforcement is a Decision Variable

Thorsten Koeppl

No 273520, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: Societies provide institutions that are costly to set up, but able to enforce longrun relationships. We study the optimal decision problem of using self-governance for risk sharing or governance through enforcement provided by these institutions. Third-party enforcement is modelled as a costly technology that consumes resources, but permits the punishment of agents who deviate from ex-ante specified allocations. We show that it is optimal to employ the technology whenever commitment problems prevent first-best risk sharing, but never optimal to provide incentives exclusively via this technology. Commitment problems then persist and the optimal incentive structure changes dynamically over time with third-party enforcement monotonically increasing in the relative inequality between agents.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 44
Date: 2005-01
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Related works:
Journal Article: Optimal dynamic risk sharing when enforcement is a decision variable (2007)
Working Paper: Optimal Dynamic Risk Sharing When Enforcement Is A Decision Variable (2005)
Working Paper: Optimal dynamic risk sharing when enforcement is a decision variable (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:quedwp:273520

DOI: 10.22004/ag.econ.273520

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