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Implications of Efficient Risk Sharing without Commitment

Narayana R. Kocherlakota
The Review of Economic Studies
Vol. 63, No. 4 (Oct., 1996), pp. 595-609
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2297795
Page Count: 15
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Implications of Efficient Risk Sharing without Commitment
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Abstract

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.

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