Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/268899 
Year of Publication: 
2023
Series/Report no.: 
CFS Working Paper Series No. 697
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
Abstract: 
We analyze efficient risk-sharing arrangements when the value from deviating is determined endogenously by another risk sharing arrangement. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any coalition formed (joined) after deviations rely on a belief in future cooperation which we term "trust". We treat the contracting conditions of original and deviation coalitions symmetrically and show that higher trust tightens incentive constraints since it facilitates the formation of deviating coalitions. As a consequence, although trust facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the extent of trust and efficient allocations might feature resource burning or utility burning: trust is indeed a double-edged sword.
Subjects: 
Coalitions
Limited Enforcement
Risk Sharing
JEL: 
E21
G22
D11
D91
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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