Risk Sharing Among Many: Implementing a Subgame Perfect and Optimal Equilibrium

Michiko Ogaku

Papers from arXiv.org

Abstract: This paper investigates whether an ex-ante welfare-maximising risk allocation rule can be implemented among many participants. Specifically, we investigate the applicability of the price and choose mechanism proposed by Echenique and N\'u\~nez(2025) to risk allocation problems. While their mechanism implements Pareto optimal allocations in finite choice sets, we consider extending it to an infinite choice set of feasible risk-sharing allocations. This paper asks whether an ex-ante welfare-maximising risk allocation rule can indeed be implemented for a large group. Specifically, we study the price and choose (P&C) mechanism of Echenique and N\'u\~nez(2025) in a risk-sharing setting. In P&C, players sequentially set prices for each possible alternative; the last player chooses an alternative, provided that all previous players receive the prices they set. Echenique and N\'u\~nez(2025) show that, for finite choice sets, the mechanism implements any Pareto optimal allocation in the subgame-perfect Nash equilibrium. Our setting differs in one crucial respect: the choice set is infinite. Each alternative is a feasible allocation of total risk, and each player sets a Lipschitz-continuous price function on this infinite set. We show that the P&C mechanism can still be extended to implement the allocation that maximises the sum of players' utilities, even with an infinite choice set.

Date: 2025-05
New Economics Papers: this item is included in nep-des, nep-gth and nep-mic
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