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An ergodic theorem for multi-period mutual insurance

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  • John Armstrong

Abstract

Suppose there are $N$ heterogeneous agents in a market with idiosyncratic risks but no uninsurable systematic risk factors. These agents may agree arbitrary financial contracts with one another, subject to the condition that contracts are self-enforcing under coalitions of agents in a common state. We show that, under mild conditions, this uniquely determines the limiting utility of every agent as $N$ tends to infinity. The result is an ergodic theorem: as the population grows, the number of degrees of freedom in the problem collapses, so that agents in the same state are treated identically in the limit. We exhibit an explicit, practically realisable mechanism achieving this limit using only short-dated contracts. The model can be applied either to an economy of heterogeneous agents pooling idiosyncratic risk through self-enforcing contracts or to the design of optimal insurance products such as pensions.

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  • John Armstrong, 2026. "An ergodic theorem for multi-period mutual insurance," Papers 2608.14256, arXiv.org.
  • Handle: RePEc:arx:papers:2608.14256
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    References listed on IDEAS

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    1. John Armstrong & Cristin Buescu & James Luke Dalby, 2025. "Optimal post-retirement investment and consumption under longevity risk in collective funds," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 2025(8), pages 833-851, September.
    2. Stamos, Michael Z., 2008. "Optimal consumption and portfolio choice for pooled annuity funds," Insurance: Mathematics and Economics, Elsevier, vol. 43(1), pages 56-68, August.
    3. Jan Bonenkamp & Ed Westerhout, 2014. "Intergenerational Risk Sharing and Endogenous Labour Supply within Funded Pension Schemes," Economica, London School of Economics and Political Science, vol. 81(323), pages 566-592, July.
    4. John Armstrong & James Dalby, 2024. "Optimal mutual insurance against systematic longevity risk," Papers 2410.07749, arXiv.org.
    5. Cui, Jiajia & Jong, Frank De & Ponds, Eduard, 2011. "Intergenerational risk sharing within funded pension schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(1), pages 1-29, January.
    6. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    7. John Armstrong, 2018. "Classifying Financial Markets up to Isomorphism," Papers 1810.03546, arXiv.org, revised Jul 2020.
    8. Antoine Bommier, 2013. "Life-Cycle Preferences Revisited," Journal of the European Economic Association, European Economic Association, vol. 11(6), pages 1290-1319, December.
    9. Gollier, Christian, 2008. "Intergenerational risk-sharing and risk-taking of a pension fund," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1463-1485, June.
    10. repec:bla:jfinan:v:59:y:2004:i:4:p:1481-1509 is not listed on IDEAS
    11. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
    12. John Armstrong & James Dalby & Rohan Hobbs, 2025. "A comparison of the effectiveness of alternative DC and CDC designs in a UK market," Papers 2504.16892, arXiv.org, revised Jul 2026.
    13. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
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