Pareto optimality and risk sharing in group utility functions

The Pareto optimality condition is a widely used assumption in group decision making. The condition requires that if each individual in the group prefers one alternative to another, then the group as a whole should prefer the alternative that is most preferred by each of the group members. This condition implies that the group utility function is an additive combination of the individual utility functions of the members of the group. We argue that Pareto optimality is a desirable property for deterministic decisions but that it need not be desirable for lotteries. We show, for example, that Pareto optimality need not be a desirable property for risk sharing or partnerships. We then present a new condition, which we refer to as “independence of indifferent group members.” We show that it is a weaker condition than Pareto optimality and derive the corresponding functional form of the group utility function.