We develop and estimate a model of dynamic interactions between households where commitment is limited and contracts are incomplete to explain the patterns of income and consumption growth in village economies of less developed countries. Households can insure through both formal contracts and...

I study the properties of optimal long-term contracts in an environment in which the agent.s type evolves stochastically over time. The model stylizes a buyer-seller relationship but the results apply quite naturally to many contractual situations including regulation and optimal...