Equilibrium in risk-sharing games
Michail Anthropelos () and
Constantinos Kardaras ()
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Michail Anthropelos: University of Piraeus
Constantinos Kardaras: London School of Economics and Political Science
Finance and Stochastics, 2017, vol. 21, issue 3, 815-865
Abstract The large majority of risk-sharing transactions involve few agents, each of whom can heavily influence the structure and the prices of securities. In this paper, we propose a game where agents’ strategic sets consist of all possible sharing securities and pricing kernels that are consistent with Arrow–Debreu sharing rules. First, it is shown that agents’ best response problems have unique solutions. The risk-sharing Nash equilibrium admits a finite-dimensional characterisation, and it is proved to exist for an arbitrary number of agents and to be unique in the two-agent game. In equilibrium, agents declare beliefs on future random outcomes different from their actual probability assessments, and the risk-sharing securities are endogenously bounded, implying (among other things) loss of efficiency. In addition, an analysis regarding extremely risk-tolerant agents indicates that they profit more from the Nash risk-sharing equilibrium than compared to the Arrow–Debreu one.
Keywords: Nash equilibrium; Risk sharing; Heterogeneous beliefs; Reporting of beliefs; 91B24; 91A06; 91B30 (search for similar items in EconPapers)
JEL-codes: G12 L13 C72 (search for similar items in EconPapers)
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