Enduring Relationships in an Economy with Capital and Private Information

Aubhik Khan, Latchezar Popov and B Ravikumar

No 2020-034, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We study efficient risk sharing in a model where agents operate linear production technologies with private information about idiosyncratic productivity. Capital is the sole factor of production, and accumulable. We establish a time-invariant, one-to-one mapping between the capital allocated to an agent and his lifetime utility entitlement. The mapping implies properties that are distinct from those in models with private information about endowments. In contrast to the latter, the value of the risk-sharing arrangement in our model always remains above the autarky value. There is no need for long-term commitment. Further, in our model, there are no net expected transfers each period across individuals. This allows us to decentralize the efficient allocation into one-period insurance contracts that do not require long-term commitment on the part of the principal or agent. Furthermore, while the efficient allocation implies an increasing dispersion of lifetime utility entitlements and consumption, this need not lead to declines in individual consumption as in the endowment model. When technology is sufficiently productive, all individuals experience consumption growth.

Keywords: Efficiency; Private information; Capital accumulation; Commitment; Immiseration; One-period contract (search for similar items in EconPapers)
JEL-codes: D30 D52 D82 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2020-09, Revised 2020-09
New Economics Papers: this item is included in nep-cta, nep-dge, nep-ore and nep-upt
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Related works:
Working Paper: Enduring Relationships in an Economy with Capital and Private Information (2012)
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DOI: 10.20955/wp.2020.034

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