Ex ante payments in self-enforcing risk-sharing contracts

We analyze a long-term risk-sharing contract between two risk-averse agents facing self-enforcing constraints. We enlarge the contracting space to allow for an ex ante transfer before the state of nature is realized and we characterize the optimal ex ante and ex post payments. We show that optimal ex ante payments are inversely related to the non-stationary expected surplus. With i.i.d. shocks, the dynamics of the optimal contract exhibit ''experience rating'' even though there is no private information or learning taking place. Finally, we assess numerically the value of introducing the ex ante payment as well as compare the dynamics of consumption with and without this payment. (C) 1997 Academic Press.