This paper examines efficient risk sharing under limited commitment and searchfrictions. The model features a social planner and a continuum of risk-averseworkers, where the planner is able to provide consumption only to workers matchedwith the planner and faces an aggregate resource constraint, while workers can walkaway from the match in any period and search for a new match. The formation ofnew matches and the exogenous destruction of existing ones substantially expandthe set of feasible stationary allocations, providing a role for the social welfarefunction. In the benchmark case of the Benthamite social welfare function, wefind that the efficient stationary allocation exhibits novel consumption dynamics:Consumption begins at a relatively low level, converges toward a certain level whenthe participation constraint is slack, and jumps up when it binds. We then explorethe role of limited commitment in generating such rich consumption dynamics.JEL Classification Codes: D86, E21, E24, J64First Version: January 2011This is a substantially revised and refocused version of an earlier paper titled “Closing Labor Search and Matching Models in Contractual Environments.”This research was supported by Grants-in-Aid for Scientific Research of the JSPS (Kakenhi No. 23730187 and No. 26780114) and the Japan Economic Research Foundation.http://www.grips.ac.jp/list/jp/facultyinfo/fujimoto-junichi
