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Financial Markets for Unknown Risks if Beliefs Differ

Author

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  • Susanne Klimpel

    (Interdisciplinary Institute for Environmental Economics, University of Heidelberg, Bergheimer Str. 20, 69115 Heidelberg, Germany)

  • Till Requate

    (Interdisciplinary Institute for Environmental Economics, University of Heidelberg, Bergheimer Str. 20, 69115 Heidelberg, Germany, e-mail: requate@mail.eco.uni-heidelberg.de)

Abstract

We consider a general equilibrium model with individual and collective risks. The article builds on a contribution by Chichilnisky and Heal, who show that contingent Arrow–Debreu equilibria can also be supported in economies with Arrow securities and mutual insurance contracts. However, they show this to be true in general only if beliefs are identical, a very restrictive assumption in the context of unknown risks. Moreover, they claim complete insurance in equilibrium to be impossible if beliefs are different. We show that even with different beliefs, firstly, complete insurance is possible in each statistical state, and secondly, contingent equilibrium can still be supported in economies with insurance and securities. The Geneva Papers on Risk and Insurance Theory (2000) 25, 29–49. doi:10.1023/A:1008745423609

Suggested Citation

  • Susanne Klimpel & Till Requate, 2000. "Financial Markets for Unknown Risks if Beliefs Differ," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 25(1), pages 29-49, June.
    • Handle: RePEc:pal:genrir:v:25:y:2000:i:1:p:29-49
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    Cited by:

    1. Geoffrey Heal & Bengt Kriström, 2002. "Uncertainty and Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 3-39, June.

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