Optimal allocations with α-MaxMin utilities, Choquet expected utilities, and Prospect Theory

Patrick Beissner () and Jan Werner
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Patrick Beissner: Research School of Economics, ANU

Theoretical Economics, 2023, vol. 18, issue 3

Abstract: The analysis of optimal risk sharing has been thus far largely restricted to non-expected utility models with concave utility functions, where concavity is an expression of ambiguity aversion and/or risk aversion. This paper extends the analysis to α-maxmin expected utility, Choquet expected utility, and Cumulative Prospect Theory, which accommodate ambiguity seeking and risk seeking attitudes. We introduce a novel methodology of quasidifferential calculus of Demyanov and Rubinov (1986, 1992) and argue that it is particularly well-suited for the analysis of these three classes of utility functions which are neither concave nor differentiable. We provide characterizations of quasidifferentials of these utility functions, derive first-order conditions for Pareto optimal allocations under uncertainty, and analyze implications of these conditions for risk sharing with and without aggregate risk.

Keywords: Ambiguity; risk sharing; non-convex preferences; Pareto optimality; quasidifferential; Clarke subdifferential; α-MaxMin expected utility; Choquet expected utility; rank-dependent expected utility; Cumulative Prospect Theory (search for similar items in EconPapers)
JEL-codes: C61 D50 D60 D81 (search for similar items in EconPapers)
Date: 2023-07-20
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Citations: View citations in EconPapers (2)

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