Two Equations on the Pareto-Efficient Sharing of Real GDP Risk
For a pure-exchange, closed economy without storage, Eagle and Domian (2005) and Koenig (2011) derive similar but different equations of Pareto-efficient risk sharing. We confirm that both equations are correct. We also generalize and reinterpret Koenig’s equation. We find that Koenig’s equation as the superior one when we use the harmonic mean to compute average relative risk aversion. Our reinterpretation of Koenig’s generalized equation is that Pareto efficiency requires that the consumption of an individual with average relative risk should be proportional to the real GDP.
|Date of creation:||31 Jan 2012|
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- David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, EconWPA.
- David Eagle & Dale Domian, 2005. "Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing," Finance 0509017, EconWPA.
- Blundell, Richard & M. Stoker, Thomas, 1999.
"Consumption and the timing of income risk,"
European Economic Review,
Elsevier, vol. 43(3), pages 475-507, March.
- Anonymous, 2003. "Competing in the 21st Century," Amber Waves, United States Department of Agriculture, Economic Research Service, April.
- Evan F. Koenig, 2011. "Monetary policy, financial stability, and the distribution of risk," Working Papers 1111, Federal Reserve Bank of Dallas.
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