Trust in risk sharing: A double-edged sword

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFS Working Paper Series ; No. 697

Classification and Topics

• Classification: Wirtschaft ; Macroeconomics: Consumption; Saving; Wealth ; Insurance; Insurance Companies; Actuarial Studies ; Consumer Economics: Theory ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡
• Subject: Coalitions ; Limited Enforcement ; Risk Sharing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cole, Harold L. ; Krueger, Dirk ; Mailath, George J. ; Park, Yena
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, Center for Financial Studies (CFS)
• (where): Frankfurt a. M.
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/268899
• URN: urn:nbn:de:hebis:30:3-689776
• Last update: 10.03.2025, 11:41 AM CET