Consumption risk sharing under private information when earnings are persistent
Paul Klein () and
No 247, 2011 Meeting Papers from Society for Economic Dynamics
In this paper we quantitatively investigate the implications of a model of consumption risk sharing where infinitely-lived households are subject to exogenous idiosyncratic shocks to their earnings, and where the realization of these shocks are private information. Our theoretical contribution relative to the existing literature is to allow for persistence in earnings. This creates some formidable obstacles to recursive computation of the optimal contract. If the earnings process follows a Markov chain whose state space has N elements, the state space for the optimal dynamic contracting problem has N continuous dimensions and is a nontrivial subset W in RN . Such a problem is prohibitively complex, first because of the dimension of the dimensionality of the state space and, second, because it is difficult to solve for W itself.
References: Add references at CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
Journal Article: Consumption Risk Sharing with Private Information and Limited Enforcement (2017)
Working Paper: Consumption Risk Sharing with Private Information and Limited Enforcement (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:247
Access Statistics for this paper
More papers in 2011 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().