Optimal Risk Sharing in Society

Knut Aase

No 2021/10, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: We consider risk sharing among individuals in a one-period setting under uncertainty, that will result in payoffs to be shared among the members. We start with optimal risk sharing in an Arrow-Debreu economy, or equivalently, in a Borch-style reinsurance market. From the results of this model we can infer how risk is optimally distributed between individuals according to their preferences and initial endow ments, under some idealized conditions. A main message in this theory is the mutuality principle, of interest related to the economic effects of pandemics. From this we point out some elements of a more gen eral theory of syndicates, where in addition, the group of people is to make a common decision under uncertainty. We extend to a compet itive market as a special case of such a syndicate.

Keywords: Optimal risk sharing; Syndicates; Savage expected utility; Evaluation measures; No-arbitrage pricing; State prices (search for similar items in EconPapers)
JEL-codes: D51 D53 D90 E21 G10 G12 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2021-12-30
New Economics Papers: this item is included in nep-mac, nep-rmg and nep-upt
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Journal Article: Optimal Risk Sharing in Society (2022)
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