RT Generic
T1 Risk-sharing with a central authority: Free-riding, lack of commitment, and bail-outs
A1 Kredler, Matthias
A1 Veiga Duarte, Rubén
AB Agents with independent risks (regions) often create unions and delegate redistributive power to a central institution (center) that provides risk-sharing through costly transfers. However, there is the risk that regions free-ride on each other; this risk may be exacerbated when the center cannot commit to future policies. We study a differential game of two regions that make savings decisions and a benevolent center that sets transfers but lacks commitment. One region always ends up bankrupt and the center provides a bailout: as the poor regions enters bankruptcy, there is an upward jump in transfers to the poor region that coincides with a downward jump in the poor region's consumption. Delegation to a center is Pareto-improving provided that the center's welfare weights reflect initial wealth differences between regions. However, once asymmetries in regions' wealth and the center's welfare weights become large, dynamics become unstable, thus hastening impoverishment and bail-outs.
YR 2023
FD 2023-05-23
LK https://hdl.handle.net/10016/37948
UL https://hdl.handle.net/10016/37948
LA eng
DS e-Archivo
RD 17 jul. 2024