Department of Economics
University of Rochester
Rochester, NY 14627
Institutional Affiliation: University of Rochester
NBER Working Papers and Publications
|January 2020||Coalition-Proof Risk Sharing Under Frictions|
with Harold L. Cole, Dirk Krueger, George J. Mailath: w26667
We analyze efficient risk-sharing arrangements when coalitions may deviate. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any deviating coalition rely on a belief in future cooperation, and we treat the contracting conditions of original and deviating coalitions symmetrically. We show that better belief coordination (higher social capital) tightens incentive constraints since it facilitates both the formation of the original as well as a deviating coalition. As a consequence, the payoff of successfully formed coalitions might be declining in the degree of belief coordination and equilibrium allocations might feature resource burning or utility burning.