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Optimal Risk Sharing in Society

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  • Knut K. Aase

    (Department of Business and Management Science, Norwegian School of Economics, 5045 Bergen, Norway)

Abstract

We consider risk sharing among individuals in a one-period setting under uncertainty that will result in payoffs to be shared among the members. We start with optimal risk sharing in an Arrow–Debreu economy, or equivalently, in a Borch-style reinsurance market. From the results of this model we can infer how risk is optimally distributed between individuals according to their preferences and initial endowments, under some idealized conditions. A main message in this theory is the mutuality principle, of interest related to the economic effects of pandemics. From this we point out some elements of a more general theory of syndicates, where in addition, a group of people are to make a common decision under uncertainty. We extend to a competitive market as a special case of such a syndicate.

Suggested Citation

  • Knut K. Aase, 2022. "Optimal Risk Sharing in Society," Mathematics, MDPI, vol. 10(1), pages 1-31, January.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:1:p:161-:d:718278
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    optimal risk sharing; syndicates; Savage expected utility; evaluation measures; no-arbitrage pricing; state prices;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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