Competitive risk sharing contracts with one-sided commitment

  • This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex-ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex-post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. We demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment e.ectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogo. (1989). From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved. JEL Klassifikation: G22, E21, D11, D91.

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Metadaten
Author:Dirk Krueger, Harald Uhlig
URN:urn:nbn:de:hebis:30-10844
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2005,07
Series (Serial Number):CFS working paper series (2005, 07)
Document Type:Working Paper
Language:English
Year of Completion:2005
Year of first Publication:2005
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:Competition; Limited Commitment; Long-term Contracts; Risk Sharing
GND Keyword:Langzeitvertrag; Risikomanagement; Haftungsbeschränkung; Wettbewerb
Issue:February 21, 2005
HeBIS-PPN:195627784
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht