Non-Commitment and Savings in Dynamic Risk-Sharing Contracts

Karine Gobert and Michel Poitevin

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: We characterize the solution to a model of consumption smoothing using financing under non-commitment and savings. We show that, under certain conditions, these two different instruments complement each other perfectly. If the rate of time preference is equal to the interest rate on savings, perfect smoothing can be achieved in finite time. We also show that, when random revenues are generated by periodic investments in capital through a concave production function, the level of smoothing achieved through financial contracts can influence the productive investment efficiency. As long as financial contracts cannot achieve perfect smoothing, productive investment will be used as a complementary smoothing device.

Keywords: savings; consumion; dynamic risk sharing; non-commitment (search for similar items in EconPapers)
JEL-codes: E20 E21 (search for similar items in EconPapers)
Pages: 28 pages
Date: 1998
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Non-commitment and savings in dynamic risk-sharing contracts (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:9806

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