Financial Markets for Unknown Risks if Beliefs Differ

Susanne Klimpel and Till Requate ()
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Susanne Klimpel: Interdisciplinary Institute for Environmental Economics, University of Heidelberg, Bergheimer Str. 20, 69115 Heidelberg, Germany

The Geneva Risk and Insurance Review, 2000, vol. 25, issue 1, 29-49

Abstract: We consider a general equilibrium model with individual and collective risks. The article builds on a contribution by Chichilnisky and Heal, who show that contingent Arrow–Debreu equilibria can also be supported in economies with Arrow securities and mutual insurance contracts. However, they show this to be true in general only if beliefs are identical, a very restrictive assumption in the context of unknown risks. Moreover, they claim complete insurance in equilibrium to be impossible if beliefs are different. We show that even with different beliefs, firstly, complete insurance is possible in each statistical state, and secondly, contingent equilibrium can still be supported in economies with insurance and securities. The Geneva Papers on Risk and Insurance Theory (2000) 25, 29–49. doi:10.1023/A:1008745423609

Date: 2000
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