Optimal Risk Sharing with Limited Liability

Semyon Malamud, Huaxia Rui and Andrew B. Whinston
Additional contact information
Semyon Malamud: Ecole Polytechnique Federale de Lausanne, Swiss Finance Institute, and Centre for Economic Policy Research (CEPR)
Huaxia Rui: University of Rochester
Andrew B. Whinston: University of Texas at Austin

No 12-05, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We solve the general problem of optimal risk sharing among a finite number of agents with limited liability. We show that the optimal allocation is characterized by endogenously determined ranks assigned to the participating agents and a hierarchical structure of risk sharing, where all agents take on risks only above the agent-specific thresholds determined by their ranks. When all agents have CARA utilities, linear risk sharing is optimal between two adjacent thresholds. We use our general characterization of optimal risk sharing with limited liability to solve the problem of optimal insurance design with multiple insurers. We show that the optimal thresholds, or deductibles, can be efficiently calculated through the fixed point of a contraction mapping. We then use this contraction mapping technique to derive a number of comparative statics results for optimal insurance design and its dependence on microeconomic characteristics.

Keywords: optimal risk sharing; limited liability; optimal insurance design (search for similar items in EconPapers)
JEL-codes: A10 D86 G22 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2012-02
New Economics Papers: this item is included in nep-gth, nep-ias and nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1205

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