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Bilateral Risk Sharing With Heterogeneous Beliefs And Exposure Constraints

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  • Boonen, Tim J.
  • Ghossoub, Mario

Abstract

This paper studies bilateral risk sharing under no aggregate uncertainty, where one agent has Expected-Utility preferences and the other agent has Rank-dependent utility preferences with a general probability distortion function. We impose exogenous constraints on the risk exposure for both agents, and we allow for any type or level of belief heterogeneity. We show that Pareto-optimal risk-sharing contracts can be obtained via a constrained utility maximization under a participation constraint of the other agent. This allows us to give an explicit characterization of optimal risk-sharing contracts. In particular, we show that an optimal risk-sharing contract contains allocations that are monotone functions of the likelihood ratio, where the latter is obtained from Lebesgue’s Decomposition Theorem.

Suggested Citation

  • Boonen, Tim J. & Ghossoub, Mario, 2020. "Bilateral Risk Sharing With Heterogeneous Beliefs And Exposure Constraints," ASTIN Bulletin, Cambridge University Press, vol. 50(1), pages 293-323, January.
    • Handle: RePEc:cup:astinb:v:50:y:2020:i:1:p:293-323_10
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    Cited by:

    1. Boonen, Tim J. & Jiang, Wenjun, 2022. "Bilateral risk sharing in a comonotone market with rank-dependent utilities," Insurance: Mathematics and Economics, Elsevier, vol. 107(C), pages 361-378.
    2. Jiang, Wenjun & Hong, Hanping & Ren, Jiandong, 2021. "Pareto-optimal reinsurance policies with maximal synergy," Insurance: Mathematics and Economics, Elsevier, vol. 96(C), pages 185-198.
    3. Jean-Gabriel Lauzier & Liyuan Lin & Ruodu Wang, 2023. "Risk sharing, measuring variability, and distortion riskmetrics," Papers 2302.04034, arXiv.org.
    4. Felix-Benedikt Liebrich, 2021. "Risk sharing under heterogeneous beliefs without convexity," Papers 2108.05791, arXiv.org, revised May 2022.
    5. Ghossoub, Mario & He, Xue Dong, 2021. "Comparative risk aversion in RDEU with applications to optimal underwriting of securities issuance," Insurance: Mathematics and Economics, Elsevier, vol. 101(PA), pages 6-22.

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