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Optimal Risk Sharing in Society

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  • Aase, Knut K.

    (Dept. of Business and Management Science, Norwegian School of Economics)

Abstract

We consider risk sharing among individuals in a one-period setting under uncertainty, that will result in payoffs to be shared among the members. We start with optimal risk sharing in an Arrow-Debreu economy, or equivalently, in a Borch-style reinsurance market. From the results of this model we can infer how risk is optimally distributed between individuals according to their preferences and initial endow ments, under some idealized conditions. A main message in this theory is the mutuality principle, of interest related to the economic effects of pandemics. From this we point out some elements of a more gen eral theory of syndicates, where in addition, the group of people is to make a common decision under uncertainty. We extend to a compet itive market as a special case of such a syndicate.

Suggested Citation

  • Aase, Knut K., 2021. "Optimal Risk Sharing in Society," Discussion Papers 2021/10, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2021_010
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Optimal risk sharing; Syndicates; Savage expected utility; Evaluation measures; No-arbitrage pricing; State prices;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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