TY  - JOUR
AU  - Krueger,Dirk
AU  - Uhlig,Harald
TI  - Competitive Risk Sharing Contracts with One-Sided Commitment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10135
PY  - 2003
Y2  - December 2003
UR  - http://www.nber.org/papers/w10135
L1  - http://www.nber.org/papers/w10135.pdf
N1  - Author contact info:
Dirk Krueger
Economics Department
University of Pennsylvania
160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-6691
Fax: 215/573-2057
E-Mail: dkrueger@econ.upenn.edu

Harald Uhlig
Dept. of Economics
University of Chicago
1126 E 59th Street
Chicago, IL 60637
Tel: 773/702-3702
Fax: 773/702-8490
E-Mail: huhlig@uchicago.edu
AB  - This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex-ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex-post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. Contrary to intuition, we demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment effectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogoff (1989). From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved.
ER  -