Optimal dynamic risk sharing when enforcement is a decision variable

Thorsten Koeppl

No 282, Working Paper Series from European Central Bank

Abstract: Societies provide institutions that are costly to use, but able to enforce long-run 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. JEL Classification: C73, D60, D91, K49

Keywords: limited commitment; risk sharing; third-party enforcement (search for similar items in EconPapers)
Date: 2003-10
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Citations: View citations in EconPapers (2)

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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)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2003282

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