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Risk-Sharing Institutions for Unpredictable Losses

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  • Goeran Skogh

Abstract

Traditional insurance theory assumes that the parties involved assign subjective probabilities of losses. Here, we demonstrate that mutually beneficial risk-sharing is possible without the assignment of a probability - it is enough that the sharing parties presume that they are faced with the same probability. This explains why parties facing similar risks, like shipowners, guilds, and joint ventures, tend to share risks in common pools - especially at the early stage when the probability distribution of losses is most uncertain. An insurance industry with policies paid ex ante usually emerges first when considerable actuarial information is available. Uncertainty and the impossibility of assigning reliable subjective probabilities render also an explanation, thus far neglected, of why the State covers risks collectively.

Suggested Citation

  • Goeran Skogh, 1999. "Risk-Sharing Institutions for Unpredictable Losses," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(3), pages 505-505, September.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(199909)155:3_505:riful_2.0.tx_2-b
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    Citations

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    Cited by:

    1. repec:pal:gpprii:v:42:y:2017:i:2:d:10.1057_s41288-016-0004-5 is not listed on IDEAS
    2. repec:spr:ieaple:v:18:y:2018:i:2:d:10.1007_s10784-018-9386-0 is not listed on IDEAS
    3. Göran Skogh & Hong Wu, 2005. "The Diversification Theorem Restated: Risk-pooling Without Assignment of Probabilities," Journal of Risk and Uncertainty, Springer, vol. 31(1), pages 35-51, July.
    4. Jakob Eberl & Darko Jus, 2012. "Evaluating policies to attain the optimal exposure to nuclear risk," RSCAS Working Papers 2012/50, European University Institute.
    5. repec:pal:gpprii:v:42:y:2017:i:2:d:10.1057_s41288-016-0001-8 is not listed on IDEAS
    6. Lundtofte, Frederik, 2015. "Banks’ pooling of corporate debt: An application of the restated diversification theorem," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 249-263.
    7. Holm, Håkan, 2000. "Politically Correct Information Adoption," Working Papers 2000:5, Lund University, Department of Economics.
    8. Nekby, Lena, 2001. "Pure vs. Mutual Sick Insurance Societies. Evidence from Swedish Historical Data," Research Papers in Economics 2001:10, Stockholm University, Department of Economics.
    9. Ali Ahmed & Göran Skogh, 2006. "Choices at various levels of uncertainty: An experimental test of the restated diversification theorem," Journal of Risk and Uncertainty, Springer, vol. 33(3), pages 183-196, December.
    10. Eberl, Jakob & Jus, Darko, 2012. "The year of the cat: Taxing nuclear risk with the help of capital markets," Energy Policy, Elsevier, vol. 51(C), pages 364-373.

    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship

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