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This paper defines and studies optimality in a dynamic stochastic economy with finitely lived agents, and investigates the optimality properties of an equilibrium with or without sequentially complete markets. Various Pareto optimality concepts are considered, including interim and ex ante optimality. We show that, at an equilibrium with a productive asset (land) and sequentially complete markets, the intervention of a government may be justified, but only to improve risk sharing between generations. If markets are incomplete, constrained interim optimality is investigated in two-period lived OLG economies. We extend the optimality properties of an equilibrium with land and examine conditions under which introducing a pay-as-you-go system would not lead to any Pareto improvement upon an equilibrium.

This paper examines whether risk sharing exists in mortgage loan agreements. Specifically, we analyze the effect of the number of co-borrowers on foreclosure risk, using data from Singapore. Through the estimation of probit model, the results consistently show that co-borrowers significantly reduce the foreclosure risk, suggesting the existence of risk sharing among the co-borrowers. In addition, foreclosure risk is reduced proportionately with the number of co-borrowers. Further analysis shows that low-rise properties required a larger number of co-borrowers than high-rise properties in order to share risk effectively. Interestingly, low-rise properties experience a greater decline in the foreclosure likelihood than high-rise properties for every increase in the number of co-borrowers.

We develop a model in which connections between individuals serve as social collateral to enforce informal insurance payments. We show that: (i) The degree of insurance is governed by the expansiveness of the network, measured with the per capita number of connections that groups have with the rest of the community. "Two-dimensional" networks—like real-world networks in Peruvian villages—are sufficiently expansive to allow very good risk-sharing. (ii) In second-best arrangements, insurance is local: agents fully share shocks within, but imperfectly between endogenously emerging risk-sharing groups. We also discuss how endogenous social collateral affects our results. (JEL D85, G22, O15, O17, Z13)

AbstractA simulation model is used to evaluate the risks and returns to feedlot operators and cattle owners in the upper Midwest that occur with alternative types of custom cattle feeding contracts. Historical price data were combined with seasonal performance data to analyze the seasonal incentives for different risk‐sharing arrangements. Seasonal returns varied significantly both as to mean and variance and point out the need for seasonally varying contract terms. Feedlot owners are significantly better off with yardage fee contracts as opposed to cost‐of‐gain contracts in terms of return variance, whereas cattle owners are only slightly better off with guaranteed cost‐of‐grain contracts.

We investigate the socially optimal design of financial networks, that allows to tackle the trade-off between risk sharing and contagion. We identify conditions on the shock distribution under which full integration or maximal segmentation is optimal. We also show that, under different conditions, the optimal network displays different levels of strength of linkages to other firms or intermediate degrees of segmentation. In the latter case, the individual and social incentives to establish linkages are not necessarily aligned. When firms face heterogeneous distributions of risks, they should optimally form linkages only with firms facing risks of the same kind.