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Riskiness, Risk Aversion, and Risk Sharing: Cooperation in a Dynamic Insurance Game

Author

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  • Sarolta Laczó

    (Toulouse School of Economics (Gremaq))

Abstract

This paper examines how cooperation in an insurance game depends on risk preferences and the riskiness of income. It considers a dynamic game where commitment is limited, and characterizes the level of cooperation as measured by the reciprocal of the discount factor above which perfect risk sharing is self-enforcing. When agents face no aggregate risk, there is more cooperation, if (i) the utility function is more concave, and if (ii) income is more risky considering a mean-preserving spread or an SSD deterioration. However, (ii) no longer holds when insurance can only be incomplete, because of the interplay of idiosyncratic and aggregate risk. In the case of exponential (isoelastic) utility, cooperation depends positively on both the coefficient of absolute (relative) risk aversion and the standard deviation (coefficient of variation), and is independent of mean income. This paper also relates the level of cooperation to informal insurance transfers and the smoothness of consumption when perfect risk sharing is not achieved.

Suggested Citation

  • Sarolta Laczó, 2008. "Riskiness, Risk Aversion, and Risk Sharing: Cooperation in a Dynamic Insurance Game," CERS-IE WORKING PAPERS 0821, Institute of Economics, Centre for Economic and Regional Studies.
    • Handle: RePEc:has:discpr:0821
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    More about this item

    Keywords

    informal insurance; limited commitment; risk preferences; riskiness; comparative statics; dynamic stochastic games;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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