Equilibrium in risk-sharing games

Michail Anthropelos and Constantinos Kardaras

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: C72 G12 L13 (search for similar items in EconPapers)
Date: 2017-07-01
New Economics Papers: this item is included in nep-gth, nep-hpe and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published in Finance and Stochastics, 1, July, 2017, 21(3), pp. 815-865. ISSN: 0949-2984

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http://eprints.lse.ac.uk/69767/ Open access version. (application/pdf)

Related works:
Working Paper: Equilibrium in risk-sharing games (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:69767

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