Dynamic Risk Sharing With Private Information and Costly Verification of Storage.

This paper studies the role of dynamic risk sharing in a world where agents have private information about their incomes, and in which their storage activities can be monitored at a cost. A principal offers long-term, full-commitment contracts to the agents, promising them consumption smoothing to some extent, as well as insurance against low incomes. The study examines the choice of optimal reporting and verification strategies and their effect on the efficiency of the contracts. The main results are that allowing for costly verifiability of storage may enable the principal to offer income-contingent transfer schemes that are Pareto-superior to pure borrowing and lending, and that only agents reporting very low incomes may be investigated.