Optimal Risk Sharing in Society

Knut Aase

Mathematics, 2022, vol. 10, issue 1, 1-31

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 endowments, 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 general theory of syndicates, where in addition, a group of people are to make a common decision under uncertainty. We extend to a competitive 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: C (search for similar items in EconPapers)
Date: 2022
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