Risk-Sharing Institutions for Unpredictable Losses

Goeran Skogh

Journal of Institutional and Theoretical Economics (JITE), 1999, vol. 155, issue 3, 505-

Abstract: Traditional insurance theory assumes that the parties involved assign subjective probabilities of losses. Here, we demonstrate that mutually beneficial risk-sharing is possible without the assignment of a probability - it is enough that the sharing parties presume that they are faced with the same probability. This explains why parties facing similar risks, like shipowners, guilds, and joint ventures, tend to share risks in common pools - especially at the early stage when the probability distribution of losses is most uncertain. An insurance industry with policies paid ex ante usually emerges first when considerable actuarial information is available. Uncertainty and the impossibility of assigning reliable subjective probabilities render also an explanation, thus far neglected, of why the State covers risks collectively.

JEL-codes: G22 H50 L14 L31 (search for similar items in EconPapers)
Date: 1999
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