Sharing Risk Efficiently Under Suboptimal Punishments For Defection
Source: Purdue University (Krannert)
The paper studies efficient risk sharing under limited enforcement (or "limited commitment") constraints determined by the threat of punishment after misbehavior. As in Kocherlakota (1996), the author assumes that society chooses from among those allocations implementable in subgame perfect equilibrium. Rather than assume that punishments implement the least desirable continuation equilibrium, he allows that punishments may be suboptimally specified from the point of view of enforcement. He characterizes (up to a technical condition) the set of allocations that may be interpreted as efficient subject to enforcement by some punishment.