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Two Equations on the Pareto-Efficient Sharing of Real GDP Risk

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  • Eagle, David M.
  • Christensen, Lars

Abstract

For a pure-exchange, closed economy without storage, Eagle and Domian (2005) and Koenig (2011) derive similar but different equations of Pareto-efficient risk sharing. We confirm that both equations are correct. We also generalize and reinterpret Koenig’s equation. We find that Koenig’s equation as the superior one when we use the harmonic mean to compute average relative risk aversion. Our reinterpretation of Koenig’s generalized equation is that Pareto efficiency requires that the consumption of an individual with average relative risk should be proportional to the real GDP.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41051.

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Date of creation: 31 Jan 2012
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Handle: RePEc:pra:mprapa:41051

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Keywords: risk sharing; Pareto efficiency; nominal GDP targeting; quasi-real indexing; inflation indexing;

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  1. David Eagle & Dale Domian, 2005. "Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing," Finance 0509017, EconWPA.
  2. David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, EconWPA.
  3. Evan F. Koenig, 2011. "Monetary policy, financial stability, and the distribution of risk," Working Papers 1111, Federal Reserve Bank of Dallas.
  4. Richard Blundell & Thomas M. Stoker, 1994. "Consumption and the timing of income risk," IFS Working Papers W94/09, Institute for Fiscal Studies.
  5. Anonymous, 2003. "Competing in the 21st Century," Amber Waves, United States Department of Agriculture, Economic Research Service, April.
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