Abstract
We extend the model of risk sharing with limited commitment (Kocherlakota, 1996) byintroducing both a public and a private (unobservable and/or non-contractible) storagetechnology. Positive public storage relaxes future participation constraints, hence it canimprove risk sharing, contrary to the case where hidden income or effort is the deepfriction. The characteristics of constrained-efficient allocations crucially depend on thestorage technology’s return. At the steady state, if the return on storage is (i) mod-erately high, both assets and the consumption distribution may remain time-varying;(ii) sufficiently high, assets converge almost surely to a constant and the consumptiondistribution is time-invariant; (iii) equal to agents’ discount rate, perfect risk sharing isself-enforcing. Agents never have an incentive to use their private storage technology,i.e., Euler inequalities are always satisfied, at the constrained-efficient allocation of ourmodel, while this is not the case without optimal public asset accumulation. Finally, wefind that, in contrast with the limited-commitment model without storage, past incomeaffects consumption growth negatively both in our model with storage and in data from Indian villages.
Original language | English |
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Article number | rdx061 |
Pages (from-to) | 1389-1424 |
Number of pages | 36 |
Journal | Review of Economic Studies |
Volume | 85 |
Issue number | 3 |
DOIs | |
Publication status | Published - 31 Oct 2017 |
Research Groups and Themes
- ECON Macroeconomics
Keywords
- risk sharing
- limited commitment
- hidden storage
- dynamic contracts
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Professor Arpad J Abraham
- School of Economics - Professor in Economics
- Bristol Poverty Institute
Person: Academic , Member