Optimal Dynamic Risk Sharing when Enforcement is a Decision Variable

Arbeitspapier

Societies provide institutions that are costly to set up, but able to enforce long-run relationships. We study the optimal decision problem of using self-governance for risk sharing or governance through enforcement provided by these institutions. Third-party enforcement is modelled as a costly technology that consumes resources, but permits the punishment of agents who deviate from ex-ante specified allocations. We show that it is optimal to employ the technology whenever commitment problems prevent first-best risk sharing, but never optimal to provide incentives exclusively via this technology. Commitment problems then persist and the optimal incentive structure changes dynamically over time with third-party enforcement monotonically increasing in the relative inequality between agents.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Queen's Economics Department Working Paper ; No. 1050

Classification and Topics

• Classification: Wirtschaft ; Stochastic and Dynamic Games; Evolutionary Games; Repeated Games ; Welfare Economics: General ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ ; Legal Procedure, the Legal System, and Illegal Behavior: Other
• Subject: Limited Commitment ; Risk Sharing ; Third-party Enforcement

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Koeppl, Thorsten
• Event: Veröffentlichung
• (who): Queen's University, Department of Economics
• (where): Kingston (Ontario)
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/189330
• Last update: 10.03.2025, 11:44 AM CET