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The Nash Bargaining Solution vs. Equilibrium in a Reinsurance Syndicate

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  • Aase, Knut K.

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

Abstract

We compare the Nash bargaining solution in a reinsurance syndicate to the competitive equilibrium allocation, focusing on uncertainty and risk aversion. Restricting attention to proportional reinsurance treaties, we find that, although these solution concepts are very different, one may just appear as a first order Taylor series approximation of the other, in certain cases. This may be good news for the Nash solution, or for the equilibrium allocation, all depending upon one’s point of view. Our model also allows us to readily identify some properties of the equilibrium allocation not be shared by the bargaining solution, and vice versa, related to both risk aversions and correlations.

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Bibliographic Info

Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2008/5.

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Length: 24 pages
Date of creation: 30 May 2008
Date of revision:
Handle: RePEc:hhs:nhhfms:2008_005

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Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Keywords: Nash’s Bargaining Solution; Equilibrium; Pareto Optimal Risk Exchange; Reinsurance Treaties; Uncertainty; Risk Aversion; Correlations; Multinormal Universe;

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  1. Roth, Alvin E & Rothblum, Uriel G, 1982. "Risk Aversion and Nash's Solution for Bargaining Games with Risky Outcomes," Econometrica, Econometric Society, vol. 50(3), pages 639-47, May.
  2. John Pratt, 2007. "Fair (and not so fair) division," Journal of Risk and Uncertainty, Springer, vol. 35(3), pages 203-236, December.
  3. Roth, Alvin E., 1977. "Independence of irrelevant alternatives, and solutions to Nash's bargaining problem," Journal of Economic Theory, Elsevier, vol. 16(2), pages 247-251, December.
  4. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  5. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
  6. Kannai, Yakar, 1977. "Concavifiability and constructions of concave utility functions," Journal of Mathematical Economics, Elsevier, vol. 4(1), pages 1-56, March.
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