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Optimal Dynamic Risk Sharing When Enforcement Is A Decision Variable

Thorsten Koeppl

No 1050, Working Paper from Economics Department, Queen's University

Abstract: Societies provide institutions that are costly to set up, 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.

Keywords: Limited Commitment; Risk Sharing; Third-party Enforcement (search for similar items in EconPapers)
JEL-codes: C73 D60 D91 K49 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2005-01
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-ias, nep-lab, nep-law and nep-upt
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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1050.pdf First version 2005 (application/pdf)

Related works:
Journal Article: Optimal dynamic risk sharing when enforcement is a decision variable (2007) Downloads
Working Paper: Optimal dynamic risk sharing when enforcement is a decision variable (2003) Downloads
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