Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/231489 
Year of Publication: 
2021
Series/Report no.: 
ECONtribute Discussion Paper No. 064
Publisher: 
University of Bonn and University of Cologne, Reinhard Selten Institute (RSI), Bonn and Cologne
Abstract: 
We analyze efficient risk-sharing arrangements when coalitions may deviate. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any deviating coalition rely on a belief in future cooperation which we term \social capital". We treat the contracting conditions of original and deviating coalitions symmetrically and show that higher social capital tightens incentive constraints since it facilitates both the formation of the original as well as a deviating coalition. As a consequence, although social capital facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the extent of social capital and equilibrium allocations might feature resource burning or utility burning: social capital is indeed a double-edged sword.
Subjects: 
Financial Coalition
Limited Enforcement
Risk Sharing
Coalition-Proof Equilibrium
JEL: 
E21
G22
D11
D91
Document Type: 
Working Paper

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