TY  - UNPD
A1  - Cole, Harold L.
A1  - Krueger, Dirk
A1  - Mailath, George J.
A1  - Park, Yena
T1  - Trust in risk sharing: a double-edged sword
N2  - We analyze efficient risk-sharing arrangements when the value from deviating is determined endogenously by another risk sharing arrangement. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any coalition formed (joined) after deviations rely on a belief in future cooperation which we term "trust". We treat the contracting conditions of original and deviation coalitions symmetrically and show that higher trust tightens incentive constraints since it facilitates the formation of deviating coalitions. As a consequence, although trust facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the extent of trust and efficient allocations might feature resource burning or utility burning: trust is indeed a double-edged sword.
T3  - CFS working paper series - No. 697 
KW  - Coalitions
KW  - Limited Enforcement
KW  - Risk Sharing
Y1  - 2022
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/68977
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-689776
UR  - https://ssrn.com/abstract=4364326
PB  - Center for Financial Studies
CY  - Frankfurt, M.
ER  -