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Risk sharing in the small and in the large

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  • Ghirardato, Paolo
  • Siniscalchi, Marciano

Abstract

This paper analyzes risk sharing in economies with no aggregate uncertainty when agents have non-convex preferences. In particular, agents need not be globally risk-averse, or uncertainty-averse in the sense of Schmeidler (1989). We identify a behavioral condition under which betting is inefficient (i.e., every Pareto-efficient allocation provides full insurance, and conversely) if and only if agents' supporting probabilities (defined as in Rigotti et al., 2008) have a non-empty intersection. Our condition is consistent with empirical and experimental evidence documenting violations of convexity in either outcomes or utilities. Our results show that the connection between speculative betting and inconsistent beliefs does not depend upon global notions of risk or ambiguity aversion.

Suggested Citation

  • Ghirardato, Paolo & Siniscalchi, Marciano, 2018. "Risk sharing in the small and in the large," Journal of Economic Theory, Elsevier, vol. 175(C), pages 730-765.
  • Handle: RePEc:eee:jetheo:v:175:y:2018:i:c:p:730-765
    DOI: 10.1016/j.jet.2018.03.001
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    3. Galanis, S., 2019. "Dynamic Consistency, Valuable Information and Subjective Beliefs," Working Papers 19/02, Department of Economics, City University London.
    4. Jan Werner, 2021. "Participation in risk sharing under ambiguity," Theory and Decision, Springer, vol. 90(3), pages 507-519, May.
    5. Galanis, Spyros, 2018. "Financial complexity and trade," Games and Economic Behavior, Elsevier, vol. 112(C), pages 219-230.

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    More about this item

    Keywords

    Risk sharing; Pareto efficiency; Ambiguity aversion; Non-convex preferences;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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