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Wiley InterScience | |||
  The Economic JournalVolume 119 Issue 536, Pages 562 - 591 Published Online: 18 Feb 2009 Journal compilation © 2010 by the Royal Economic Society (Registered Charity No. 231508) Published on behalf of the Royal Economic Society
Abstract | References | Full Text: HTML, PDF (Size: 299K) | Related Articles | Citation Tracking  Implications of Endogenous Group Formation for Efficient Risk-Sharing Copyright Journal compilation © 2009 by the Royal Economic Society (Registered Charity No. 231508) ABSTRACTThe existing literature on sub-game perfect risk-sharing suffers from a basic inconsistency. While a group of size n is able to coordinate on a risk-sharing outcome, it is assumed that deviating subgroups cannot. I relax this assumption and characterise the optimal contract among all coalition-proof history-dependent contracts. This alters the predictions of the standard dynamic limited commitment model. I show that the consumption of constrained agents depends on both the history of shocks and its interaction with the current income of other constrained agents. From this, I derive a formal test for the presence of endogenous group formation under limited commitment. | 
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