Risk Sharing in Dynamic Relational Contracts

Timothy Worrall and Jonathan Thomas

No 236, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: This paper considers a long-term relationship between two risk averse agents who undertake joint investments. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as share risk and maximise surplus. Convergence to an invariant distribution is shown. For some parameterisations the invariant distribution is degenerate and the long-rum outcome is a stationary state. In other case the invariant distribution is unique and in further cases the long-rum invariant distribution depends on initial conditions. We show convergence to the dynamics of the pure risk-sharing case when agents cannot vary investments.

Date: 2011
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