Mutual insurance, individual savings and limited commitment

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Abstract

We examine a dynamic model of mutual insurance when households can also engage in self-insurance by storage. We assume that there is no enforcement mechanism, so that any insurance is informal and must be self-enforcing. We show that consumption allocations satisfy a modified Euler condition and that an enhanced storage technology can either improve or diminish welfare. Furthermore we show that the ex ante transfers introduced into dynamic informal insurance models recently by Gauthier et al. (Gauthier, C., Poitevin, M., and González, P. (1997). Journal of Economic Theory76, 106–144) are only used here in the first period, with the role of ex ante transfers being replaced by differential individual storage. Journal of Economic Literature Classification Numbers: C61, C73, D90, E21.
Original languageEnglish
Pages (from-to)216-246
Number of pages31
JournalReview of Economic Dynamics
Volume3
Issue number2
DOIs
Publication statusPublished - Apr 2000

Keywords

  • limited commitment
  • risk sharing
  • storage

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