Assortative Matching and Risk Sharing

Hailin Sun, Sanxi Li and Tong Wang
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Hailin Sun: University of Toulouse
Sanxi Li: Renmin University

No 41, University of East Anglia Applied and Financial Economics Working Paper Series from School of Economics, University of East Anglia, Norwich, UK.

Abstract: This paper analyzes sorting pattern of risk-sharing partnerships where agents are heterogenous in their income riskiness. When preference belongs to the class of HARA, household production in terms of monetary equivalence is perfectly transferable between spouses. Hence the characterization of stable match which minimizes social risk premium crucially depends on the interaction between risks in the household portfolio. In the multiplicative model where individuals are ranked by their holdings of a common risky stock, the convexity of household risk premium in joint risk size lead to negative assortative matching. In the additive model where individuals are ranked by their idiosyncratic risks in the Rothschild-Stiglitz sense, negative sorting is stable if any Rothschild-Stiglitz deterioration raises local risk aversion a la Ross.

Date: 2013-04
New Economics Papers: this item is included in nep-mic
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