IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp1205.html
   My bibliography  Save this paper

Optimal Risk Sharing with Limited Liability

Author

Listed:
  • 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)

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.

Suggested Citation

  • Semyon Malamud & Huaxia Rui & Andrew B. Whinston, 2012. "Optimal Risk Sharing with Limited Liability," Swiss Finance Institute Research Paper Series 12-05, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1205
    as

    Download full text from publisher

    File URL: http://ssrn.com/abstract=2002844
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Guo, Guixia & Wang, Frank Yong & Wei, Xu, 2014. "Optimal tranching with diverse beliefs," Economics Letters, Elsevier, vol. 124(2), pages 222-226.

    More about this item

    Keywords

    optimal risk sharing; limited liability; optimal insurance design;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp1205. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.