Individual Risk and Mutual Insurance

David Cass, Graciela Chichilnisky and Ho-Mou Wu ()

Econometrica, 1996, vol. 64, issue 2, 333-41

Abstract: This paper examines how, in the presence of individual risk, economic efficiency can be achieved without an unrealistically large number of contingent markets. The authors show that consistency of beliefs and optimality of allocation can be guaranteed with an appropriate array of Arrow securities to spread collective risk and Malinvaud mutual insurance policies to pool individual risk. If there are N households (consisting of H types), each facing the possibility of being in S individual states together with T collective states, then ensuring Pareto optimality requires only H(S - 1)T independent mutual insurance policies plus T pure Arrow securities. Copyright 1996 by The Econometric Society.

Date: 1996
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