Trust in Risk Sharing : A Double-Edged Sword / Harold L. Cole [and three others].

Format:

Book

Author/Creator:

Cole, Harold L., author.

Series:

Working Paper Series (National Bureau of Economic Research) ; no. w26667.

NBER working paper series ; no. w26667

Language:

English

Subjects (All):

Coalitions.

Physical Description:

1 online resource (90 pages) : illustrations (black and white).

Place of Publication:

Cambridge, Massachusetts : National Bureau of Economic Research, 2020.

Summary:

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.

Notes:

Description based on publisher supplied metadata and other sources.