Journal Article

Implications of Efficient Risk Sharing without Commitment

Narayana R. Kocherlakota

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 63, issue 4, pages 595-609
Published in print October 1996 | ISSN: 0034-6527
e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.2307/2297795
Implications of Efficient Risk Sharing without Commitment

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Consumption data generally indicates that consumption risk is not perfectly diversified across individuals. This paper considers if and when imperfect diversification is a feature of efficient allocations in a symmetric information environment without commitment. It shows that if individuals are sufficiently patient, imperfect diversification is always sub-optimal in the long run; however, if individuals are not so patient, imperfect diversification is always optimal. The paper goes on to demonstrate that the way that history matters in an efficient allocation in a symmetric-information/no-commitment environment can be used to distinguish lack of commitment from other possible rationalizations of imperfect risk sharing, such as efficiency in the presence of asymmetric information.

Journal Article.  0 words. 

Subjects: Economics

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