The Nash Bargaining Solution vs. Equilibrium in a Reinsurance Syndicate

25 Pages Posted: 16 Jun 2008

See all articles by Knut K. Aase

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: May 30, 2008

Abstract

We compare the Nash bargaining solution in a reinsurance syndicate to the competitive equilibrium allocation, focusing on uncertainty and risk aversion. Restricting attention to proportional reinsurance treaties, we find that, although these solution concepts are very different, one may just appear as a first order Taylor series approximation of the other, in certain cases. This may be good news for the Nash solution, or for the equilibrium allocation, all depending upon one's point of view.

Our model also allows us to readily identify some properties of the equilibrium allocation not be shared by the bargaining solution, and vice versa, related to both risk aversions and correlations.

Keywords: Nash's Bargaining Solution, Equilibrium, Pareto Optimal Risk Exchange, Reinsurance Treaties, Uncertainty, Risk Aversion, Correlations, Multinormal Universe

Suggested Citation

Aase, Knut K., The Nash Bargaining Solution vs. Equilibrium in a Reinsurance Syndicate (May 30, 2008). NHH Dept. of Finance & Management Science Discussion Paper No. 2008/5. Available at SSRN: https://ssrn.com/abstract=1145286 or http://dx.doi.org/10.2139/ssrn.1145286

Knut K. Aase (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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