Risk allocation and financial intermediation

Arnaud Goussebaïle

Mathematical Social Sciences, 2022, vol. 120, issue C, 78-84

Abstract: The classic Arrow–Debreu framework requires a very large number of specific securities to reach Pareto optimality. The present paper shows that financial intermediation can play an important role in maintaining a more parsimonious market framework while still obtaining Pareto optimality. In the framework developed, the aggregate risk components of individual risks are exchanged through a highly reduced set of nonspecific securities, while the idiosyncratic risk components are insured through financial intermediation. Reaching Pareto optimality does not rest on a Law of Large Numbers approximation. The role of financial intermediation is complementary to the role of security derivatives and dynamic trading.

Keywords: Risk allocation; General equilibrium; Securities; Insurance; Financial intermediation; Market completeness (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165489622000749
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:120:y:2022:i:c:p:78-84

DOI: 10.1016/j.mathsocsci.2022.09.004

Access Statistics for this article

Mathematical Social Sciences is currently edited by J.-F. Laslier

More articles in Mathematical Social Sciences from Elsevier
Bibliographic data for series maintained by Catherine Liu ().