scholarly journals RISK SHARING WITH EXPECTED AND DUAL UTILITIES

2017 ◽  
Vol 47 (2) ◽  
pp. 391-415 ◽  
Author(s):  
Tim J. Boonen
Keyword(s):  
Expected Utility ◽  
Risk Sharing ◽  
Competitive Equilibrium ◽  
Average Risk ◽  
Optimal Contract ◽  
Representative Agent ◽  
Equilibrium Prices ◽  
Competitive Equilibria ◽  
Utility Preferences ◽  
Optimal Risk Sharing

AbstractThis 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.

Experimental Stock Markets with Controlled Risk Preferences

1992 ◽  
Vol 7 (2) ◽  
pp. 117-134 ◽  
Author(s):  
John R. O'Brien
Keyword(s):  
Risk Sharing ◽  
Competitive Equilibrium ◽  
Risk Preferences ◽  
World Market ◽  
Equilibrium Price ◽  
Double Auction ◽  
Pareto Optimal ◽  
Market Institution ◽  
Certainty Equivalents ◽  
Optimal Risk Sharing

In this paper the empirical validity of the binary lottery preference inducing technique is tested in a real world market institution. In each market the potential gains to exchange arise from induced risk preferences, and the predicted competitive equilibrium is equivalent to the Pareto optimal risk sharing allocation. Price convergence to (and near) the competitive equilibrium price was rapid in each market, and most trades were individually rational with respect to induced certainty equivalents. This evidence implies that preferences can be induced in an oral double auction institution, using this technique.

scholarly journals BILATERAL RISK SHARING WITH HETEROGENEOUS BELIEFS AND EXPOSURE CONSTRAINTS

2020 ◽  
Vol 50 (1) ◽  
pp. 293-323 ◽  
Author(s):  
Tim J. Boonen ◽  
Mario Ghossoub
Keyword(s):  
Risk Sharing ◽  
Decomposition Theorem ◽  
The Other ◽  
Monotone Functions ◽  
Rank Dependent Utility ◽  
Belief Heterogeneity ◽  
Participation Constraint ◽  
Utility Preferences ◽  
Optimal Risk Sharing

AbstractThis paper studies bilateral risk sharing under no aggregate uncertainty, where one agent has Expected-Utility preferences and the other agent has Rank-dependent utility preferences with a general probability distortion function. We impose exogenous constraints on the risk exposure for both agents, and we allow for any type or level of belief heterogeneity. We show that Pareto-optimal risk-sharing contracts can be obtained via a constrained utility maximization under a participation constraint of the other agent. This allows us to give an explicit characterization of optimal risk-sharing contracts. In particular, we show that an optimal risk-sharing contract contains allocations that are monotone functions of the likelihood ratio, where the latter is obtained from Lebesgue’s Decomposition Theorem.

scholarly journals Sustainable debt

2021 ◽  
Vol 16 (4) ◽  
pp. 1513-1555
Author(s):  
G. Bloise ◽  
H. Polemarchakis ◽  
Y. Vailakis
Keyword(s):  
Risk Sharing ◽  
Competitive Equilibrium ◽  
Asset Market ◽  
Gains From Trade ◽  
Debt Contracts ◽  
Private Debt ◽  
Inside Money ◽  
Legal Sanctions ◽  
Competitive Equilibria ◽  
Incomplete Asset Market

We show that debt is sustainable at a competitive equilibrium based solely on the reputation for repayment; that is, even without collateral or legal sanctions available to creditors. In an incomplete asset market, when the rate of interest falls recurrently below the rate of growth of the economy, self‐insurance is more costly than borrowing, and repayments on loans are enforced by the implicit threat of loss of the risk‐sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money, and it is not valued as a speculative bubble. Competitive equilibria with self‐enforcing debt exist under a suitable hypothesis of gains from trade.

scholarly journals Optimal risk-sharing rules and equilibria with Choquet-expected-utility

2000 ◽  
Vol 34 (2) ◽  
pp. 191-214 ◽  
Author(s):  
Alain Chateauneuf ◽  
Rose-Anne Dana ◽  
Jean-Marc Tallon
Keyword(s):  
Expected Utility ◽  
Risk Sharing ◽  
Choquet Expected Utility ◽  
Sharing Rules ◽  
Optimal Risk Sharing

If It Is Surely Better, Do It More? Implications for Preferences Under Ambiguity

2021 ◽  
Author(s):  
Soheil Ghili ◽  
Peter Klibanoff
Keyword(s):  
Expected Utility ◽  
Ambiguity Aversion ◽  
Upper Bounds ◽  
Maxmin Expected Utility ◽  
Weak Dominance ◽  
Choice Under Uncertainty ◽  
Tight Connection ◽  
Sales Agent ◽  
Utility Preferences ◽  
Sensitive Behavior

Consider a canonical problem in choice under uncertainty: choosing from a convex feasible set consisting of all (Anscombe–Aumann) mixtures of two acts f and g, [Formula: see text]. We propose a preference condition, monotonicity in optimal mixtures, which says that surely improving the act f (in the sense of weak dominance) makes the optimal weight(s) on f weakly higher. We use a stylized model of a sales agent reacting to incentives to illustrate the tight connection between monotonicity in optimal mixtures and a monotone comparative static of interest in applications. We then explore more generally the relation between this condition and preferences exhibiting ambiguity-sensitive behavior as in the classic Ellsberg paradoxes. We find that monotonicity in optimal mixtures and ambiguity aversion (even only local to an event) are incompatible for a large and popular class of ambiguity-sensitive preferences (the c-linearly biseparable class. This implies, for example, that maxmin expected utility preferences are consistent with monotonicity in optimal mixtures if and only if they are subjective expected utility preferences. This incompatibility is not between monotonicity in optimal mixtures and ambiguity aversion per se. For example, we show that smooth ambiguity preferences can satisfy both properties as long as they are not too ambiguity averse. Our most general result, applying to an extremely broad universe of preferences, shows a sense in which monotonicity in optimal mixtures places upper bounds on the intensity of ambiguity-averse behavior. This paper was accepted by Manel Baucells, decision analysis.

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