ECON 704 Midterm: Prelim2015B-2_704_Cole
Document Summary
Consider the following model of insurance with limited enforcement and complete informa- tion. There is an isolated village in which each household can grow food. For simplicity assume that there is an in(cid:133)nite number of these households, all of which are ex ante identi- cal. A household(cid:146)s production of food in period t is given by yt and follows an i. i. d. process in which yt 2 y; and the probability for output is given by (cid:5)(yt). Assume that the village su ers from a terrible rat problem, so food is not storable. The households have preferences of stochastic consumption streams given by. E( 1xt=0 (cid:12) tu(ct)) ; where u is strictly concave. Originally the villagers lived a life of isolation and potential desolation in which each household just ate the food it grew each period.
