Discussion paper

DP14333 Coalition-Proof Risk Sharing Under Frictions

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.

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Citation

Krueger, D, H Cole, G Mailath and Y Park (eds) (2020), “DP14333 Coalition-Proof Risk Sharing Under Frictions”, CEPR Press Discussion Paper No. 14333. https://cepr.org/publications/dp14333