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The Impact of Risk Sharing on Efficient Decision

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  • Pratt, John W
  • Zeckhauser, Richard J

Abstract

A group of risk-averse members must choose among monetary risks and payoff-sharing rules. Departure from the status quo requires unanimous consent. Such groups drill for oil, bail out nations, and make hostile takeover bids. Assume agreement on probabilities. As is well known, if all members have identically shaped HARA utility functions, efficient group act-choices follow another such function independently of payoff sharing. We show that all other groups inevitably have complex efficient behavior, accepting gambles among individually unacceptable lotteries in almost every status quo position. We also develop proper risk aversion for groups, and treat disagreement on probabilities. Copyright 1989 by Kluwer Academic Publishers

Suggested Citation

  • Pratt, John W & Zeckhauser, Richard J, 1989. "The Impact of Risk Sharing on Efficient Decision," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 219-234, September.
  • Handle: RePEc:kap:jrisku:v:2:y:1989:i:3:p:219-34
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    Cited by:

    1. Elyès Jouini & Clotilde Napp & Diego Nocetti, 2013. "Collective risk aversion," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 40(2), pages 411-437, February.
    2. James E. Smith, 1998. "Evaluating Income Streams: A Decision Analysis Approach," Management Science, INFORMS, vol. 44(12-Part-1), pages 1690-1708, December.
    3. repec:eee:jetheo:v:173:y:2018:i:c:p:289-319 is not listed on IDEAS
    4. Gordon Rausser & William Balson & Reid Stevens, 2010. "Centralized clearing for over-the-counter derivatives," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 2(4), pages 346-359, November.
    5. John W. Pratt, 2000. "Efficient Risk Sharing: The Last Frontier," Management Science, INFORMS, vol. 46(12), pages 1545-1553, December.
    6. Maurizio Mazzocco, 2004. "Saving, Risk Sharing, and Preferences for Risk," American Economic Review, American Economic Association, vol. 94(4), pages 1169-1182, September.
    7. David M. Cutler & Richard J. Zeckhauser, 1999. "Reinsurance for Catastrophes and Cataclysms," NBER Chapters,in: The Financing of Catastrophe Risk, pages 233-274 National Bureau of Economic Research, Inc.

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