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People Smooth Their Consumption. Shouldn’t Nations, Too?
Theory says consumption should be less volatile than income because people use savings or borrow to smooth consumption. Yet, some nations don’t appear to follow this.
Working Paper
Markov-Perfect Risk Sharing, Moral Hazard and Limited Commitment
We define, characterize and compute Markov-perfect risk-sharing contracts in a dynamic stochastic economy with endogenous asset accumulation and simultaneous limited commitment and moral hazard frictions. We prove that Markov-perfect insurance contracts preserve standard properties of optimal insurance with private information and are not more restrictive than a long-term contract with one-sided commitment. Markov-perfect contracts imply a determinate asset time-path and a non-degenerate long-run stationary wealth distribution. We show numerically that Markov-perfect contracts provide sizably ...