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RISK SHARING WITH EXPECTED AND DUAL UTILITIES

Published online by Cambridge University Press:  11 May 2017

Tim J. Boonen
Tim J. Boonen*
Affiliation:
Amsterdam School of Economics, University of Amsterdam, Roetersstraat 11, 1018 WB, Amsterdam, The Netherlands
*
E-Mail: t.j.boonen@uva.nl
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Abstract

This paper analyzes optimal risk sharing among agents that are endowed with either expected utility preferences or with dual utility preferences. We find that Pareto optimal risk redistributions and the competitive equilibria can be obtained via bargaining with a hypothetical representative agent of expected utility maximizers and a hypothetical representative agent of dual utility maximizers. The representative agent of expected utility maximizers resembles an average risk-averse agent, whereas representative agent of dual utility maximizers resembles an agent that has lowest aversion to mean-preserving spreads. This bargaining leads to an allocation of the aggregate risk to both groups of agents. The optimal contract for the expected utility maximizers is proportional to their allocated risk, and the optimal contract for the dual utility maximizing agents is given by “tranching” of their allocated risk. We show a method to derive equilibrium prices. We identify a condition under which prices are locally independent of the expected utility functions, and given in closed form. Moreover, we characterize uniqueness of the competitive equilibrium.

Keywords

Pareto optimal risk sharingcompetitive equilibriaexpected utilitydual utility
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 47 , Issue 2 , May 2017 , pp. 391 - 415
Copyright
Copyright © Astin Bulletin 2017 

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