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Efficient Risk-Sharing Rules with Heterogeneous Risk Attitudes and Background Risks

Chiaki Hara (), James Huang () and Christoph Kuzmics
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James Huang: Department of Accounting and Management, Lancaster University Management School

No 621, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: In an exchange economy in which there is a complete set of markets for macroeconomic risks but no market for idiosyncratic risks, we consider how the efficient risk-sharing rules for the macroeconomic risk are affected by the heterogeneity in the consumers' risk attitudes and idiosyncratic risks. We provide sufficient conditions under which an idiosyncratic risk increases cautiousness (the derivative of the reciprocal of the absolute risk aversion), the determinant of the curvatures of the efficient risk-sharing rules. While the curvature of the risk-sharing rules at high consumption levels are governed by the consumers' risk attitudes, the curvature at low consumption levels depend not only on the risk attitudes but also on the lower tail distributions of the idiosyncratic risks.

Keywords: Efficient risk-sharing rules; relative risk aversion; absolute risk tolerance; Inada condition; idiosyncratic risks; background risks; incomplete markets. (search for similar items in EconPapers)
JEL-codes: D51 D58 D81 G11 G12 G13 (search for similar items in EconPapers)
Pages: 30pages
Date: 2006-05
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-upt
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