Private Information, Limited Commitment, And Risk Sharing

This paper explores a model that considers an exchange economy with a continuum of agents, each of whom is subject to idiosyncratic endowment shocks. It studies efficient allocations subject to two constraints: limited enforcement of financial contracts, and private information about the predictable component of the future endowment process. In this economy the immiseration result, common in this literature, does not hold, and a nontrivial steady state distribution exists. This paper calibrates the model to match the basic aggregate moments of the US economy, and attempts to find evidence that the efficient allocation implied by the model captures some of the very key features of observed partial risk sharing among households.