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Assortative Matching and Risk Sharing

Author

Listed:
  • Hailin Sun

    (University of Toulouse)

  • Sanxi Li

    (Renmin University)

  • Tong Wang

    (University of East Anglia)

Abstract

This paper analyzes sorting pattern of risk-sharing partnerships where agents are heterogenous in their income riskiness. When preference belongs to the class of HARA, household production in terms of monetary equivalence is perfectly transferable between spouses. Hence the characterization of stable match which minimizes social risk premium crucially depends on the interaction between risks in the household portfolio. In the multiplicative model where individuals are ranked by their holdings of a common risky stock, the convexity of household risk premium in joint risk size lead to negative assortative matching. In the additive model where individuals are ranked by their idiosyncratic risks in the Rothschild-Stiglitz sense, negative sorting is stable if any Rothschild-Stiglitz deterioration raises local risk aversion a la Ross.

Suggested Citation

  • Hailin Sun & Sanxi Li & Tong Wang, 2013. "Assortative Matching and Risk Sharing," University of East Anglia Applied and Financial Economics Working Paper Series 041, School of Economics, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:aepppr:2012_41
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