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The Theory of Risk-Bearing: Small and Great Risks

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  • Arrow, Kenneth J

Abstract

Under certain conditions, risk-sharing and, in particular, insurance are mutually advantageous transactions. An ideal competitive market for risk-shifting is described; the payments received by individuals depend on the resolution of all the uncertainties at the time of the market, including, for example, damages to all parties, not just to the insured. In an ideal system, premiums depend only on the total damage in a given state, not on its distribution over individuals. In particular, mitigation measures are optimally induced. The differences between the ideal model of insurance and the real world are described, and some explanations offered. Copyright 1996 by Kluwer Academic Publishers

Suggested Citation

  • Arrow, Kenneth J, 1996. "The Theory of Risk-Bearing: Small and Great Risks," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 103-111, May.
  • Handle: RePEc:kap:jrisku:v:12:y:1996:i:2-3:p:103-11
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    Cited by:

    1. Ermoliev, Y. & Ermolieva, T. & Fischer, G. & Makowski, M. & Nilsson, S. & Obersteiner, M., 2008. "Discounting, catastrophic risks management and vulnerability modeling," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(4), pages 917-924.
    2. Ermoliev, Yuri M. & Ermolieva, Tatiana Y. & MacDonald, Gordon J. & Norkin, Vladimir I. & Amendola, Aniello, 2000. "A system approach to management of catastrophic risks," European Journal of Operational Research, Elsevier, vol. 122(2), pages 452-460, April.
    3. Enjolras, Geoffroy & Kast, Robert, 2007. "Using participating and financial contracts to insure catastrophe risk: Implications for crop risk management," 101st Seminar, July 5-6, 2007, Berlin Germany 9268, European Association of Agricultural Economists.
    4. Masuku, Micah B. & Raufu, M. O. & Malinga, Nokwanda G., 2015. "The Impact of Credit on Technical Efficiency Among Vegetable Farmers in Swaziland," Sustainable Agriculture Research, Canadian Center of Science and Education, vol. 4(1).
    5. Skees, Jerry R., 2000. "A role for capital markets in natural disasters: a piece of the food security puzzle," Food Policy, Elsevier, vol. 25(3), pages 365-378, June.
    6. Levinson, David & Parthasarathi, Pavithra Kandadai, 2001. "Evaluation Methods for Measuring the Value of ITS Services and Benefits from Implementation: Part X Freeway Service Patrols," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt8nj1t4bg, Institute of Transportation Studies, UC Berkeley.
    7. Powers, Michael R. & Shubik, Martin, 2001. "Toward a theory of reinsurance and retrocession," Insurance: Mathematics and Economics, Elsevier, vol. 29(2), pages 271-290, October.
    8. Stefanescu, Razvan & Dumitriu, Ramona, 2015. "Alegerea soluţiilor pentru expunerile faţă de risc
      [Choosing solutions to risk exposures]
      ," MPRA Paper 65074, University Library of Munich, Germany.
    9. Miranda Sarmento, J.J., 2014. "Public private partnerships," Other publications TiSEM c7d4c978-234c-4f88-83ed-1, Tilburg University, School of Economics and Management.
    10. Jeffrey Czajkowski & Kevin M. Simmons, 2014. "Convective Storm Vulnerability: Quantifying the Role of Effective and Well-Enforced Building Codes in Minimizing Missouri Hail Property Damage," Land Economics, University of Wisconsin Press, vol. 90(3), pages 482-508.
    11. Andrés Solimano, 2003. "Prevention and Insurance of Conflict and Terrorism: Issues and Evidence for Latin America," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(121), pages 617-625.
    12. Ozlem Ozdemir & Andrea Morone, 2014. "An experimental investigation of insurance decisions in low probability and high loss risk situations," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 9(1), pages 53-67, April.
    13. Liu, Dan & Tsegai, Daniel W., 2011. "The New Cooperative Medical Scheme (NCMS) and its implications for access to health care and medical expenditure: Evidence from rural China," Discussion Papers 116746, University of Bonn, Center for Development Research (ZEF).

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