Common Contracts
1 similar Risk-Sharing Agreement contracts
Cooperation in Risk-Sharing AgreementsRisk-Sharing Agreement • November 14th, 2015
We study the possible rise of cooperation in risk-sharing agreements where, in the first stage, the ”pool™ collectively chooses the level of reimbursement and, in the second stage, each member individually selects a costly loss-mitigating action which is not contractible. The action can be chosen either non-cooperatively or cooperatively and the game is repeated an indefinite number of periods. We first show that the pool offers partial coverage under non-cooperation and full coverage under cooperation. Then we show that, in the repeated game, cooperative behaviors improve efficiency by reducing the total amount to be reimbursed by the pool in each period but they also generate strong free-riding incentives that are increasing in the pool size. We thus identify a new interesting trade-off: welfare generated by the risk-sharing agreement is increasing with the size of the pool, but at the same time the pool size must not be too large for cooperation to be self-enforcing. This informs on
