Matching to Share Risk without Commitment

Authors


  • We thank the editor Martin Cripps, two anonymous referees and seminar and conference participants at Universitat Autònoma de Barcelona, Institut d’Anàlisi Econòmica, ESEM in Oslo, ENTER Jamboree in Brussels, Barcelona GSE Summer Forum, CEF in Vancouver, UIMP, RES in Manchester, EEA in Toulouse, University of Alicante and the Coalition Theory Network workshop in Moscow for useful comments and suggestions. All errors are our own. Gierlinger gratefully acknowledges financial support from the Spanish Ministry of Economy and Competitiveness through grant ECO2015-67602-P and through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2011-0075). The research leading to this article received funding from the European Research Council under the European Community's Seventh Framework Programme (FP7/2007-2013) Grant agreement no 230589. Financial support by Fundación Ramón Areces is gratefully acknowledged. Laczó acknowledges funding from the Spanish Ministry of Science and Innovation, grant ECO2008-04785, and the JAE-Doc programme co-financed by the European Social Fund.

Abstract

This article studies the effect of limited commitment on sorting when two sides of a frictionless market form pairs to share risk. On each side, agents are identical except for their risk preferences. First, we provide analytical results when transfers do not condition on the history of shocks. More risk-averse agents can commit to larger transfers, as long as their consumption is less risky than their endowment. With sufficiently large idiosyncratic risk and sufficient discounting of the future, matching is positive assortative, unlike under full commitment. Second, we find positive-assortative stable matchings when transfers are history dependent, using a numerical algorithm.

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