Trust in Risk Sharing: A Double-Edged Sword

Dirk Krueger, Harold Cole, George Mailath and Yena Park

No 14333, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze efficient risk-sharing arrangements when the value from deviating is determined endogenously by another risk sharing arrangement. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any coalition formed (joined) after deviations rely on a belief in future cooperation which we term ``trust''. We treat the contracting conditions of original and deviation coalitions symmetrically and show that higher trust tightens incentive constraints since it facilitates the formation of deviating coalitions. As a consequence, although trust facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the extent of trust and efficient allocations might feature resource burning or utility burning: trust is indeed a double-edged sword.

Keywords: Coalitions; Risk sharing; Limited commitment (search for similar items in EconPapers)
JEL-codes: E20 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-cta, nep-gth, nep-mac and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP14333 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Trust in Risk Sharing: A Double-Edged Sword (2024)
Working Paper: Trust in Risk Sharing: A Double-Edged Sword (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:14333

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP14333

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().