Participation in risk sharing under ambiguity

This paper is about (non) participation in efficient risk sharing among agents who have ambiguous beliefs about uncertain states of nature. The question we ask is whether and how can ambiguous beliefs give rise to some agents not participating in efficient risk sharing. Ambiguity of beliefs is described by the multiple-prior expected utility of Gilboa and Schmeidler (J Math Econ 18:141–153, 1989), or the variational preferences of Maccheroni et al. (Econometrica 74(6):1447–1498, 2006). The main result says that if the aggregate risk is relatively small, then the agents whose beliefs are the most ambiguous do not participate in risk sharing. The higher the ambiguity of those agents’ beliefs, the more likely is their non-participation. Another factor making non-participation more likely is low risk aversion of agents whose beliefs are less ambiguous. We discuss implications of our results on agents’ participation in trade in equilibrium in assets markets.