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Seminario de matemática aplicada
Seminario de matemática aplicada
RISK-SHARING WITH A CENTRAL
AUTHORITY: FREE-RIDING, LACK OF
COMMITMENT, AND BAIL-OUTS
AUTHORITY: FREE-RIDING, LACK OF
COMMITMENT, AND BAIL-OUTS
SPEAKER: Matthias Kredler
(UC3M)
DATE: Thursday, 28 March 2019 - 17:30
VENUE: Aula 320, Departamento de Matemáticas, UAM
ABSTRACT: Agents with independent risks (regions) often create unions and
delegate re-distributive power to a central institution (center), which provides
risk-sharing through transfers. How- ever, there is the risk that regions free-ride on
each other; this risk may be exacerbated when the center cannot commit to future
policies. This problem is particularly present in fiscal federations. We study a
differential game of two regions that make savings decisions and a benevolent center
that sets transfers but lacks commitment. When transfers are costless, we find two
kinds of equilibria. In the first, the center immediately expropriates the less- liked
region. In the second, the center provides a smooth transfer schedule and regions’
bankruptcy can be avoided; this second equilibrium exists only in the knife-edge case
that the center puts exactly the same welfare weights on both regions. When
transfers are costly, one region always ends up bankrupt and the center provides
what resembles a bailout: as the poor regions enters bankruptcy, there is an upward
jump in transfers to the poor region that coincides with a downward discontinuity in
the poor region’s consumption. Joint work with Ruben Veiga Duarte.
delegate re-distributive power to a central institution (center), which provides
risk-sharing through transfers. How- ever, there is the risk that regions free-ride on
each other; this risk may be exacerbated when the center cannot commit to future
policies. This problem is particularly present in fiscal federations. We study a
differential game of two regions that make savings decisions and a benevolent center
that sets transfers but lacks commitment. When transfers are costless, we find two
kinds of equilibria. In the first, the center immediately expropriates the less- liked
region. In the second, the center provides a smooth transfer schedule and regions’
bankruptcy can be avoided; this second equilibrium exists only in the knife-edge case
that the center puts exactly the same welfare weights on both regions. When
transfers are costly, one region always ends up bankrupt and the center provides
what resembles a bailout: as the poor regions enters bankruptcy, there is an upward
jump in transfers to the poor region that coincides with a downward discontinuity in
the poor region’s consumption. Joint work with Ruben Veiga Duarte.
Location DATE: Thursday, 28 March 2019 - 17:30 VENUE: Aula 320, Departamento de Matemáticas, UAM