Information, Incentives, and Effects of Risk-Sharing on the Real Economy

25 Pages Posted: 10 Apr 2019

See all articles by Mark H. Liu

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Date Written: November 1, 2018

Abstract

In the absence of market imperfections, the mutuality principle leads to efficient risk sharing and the Pareto optimal asset allocations. With market imperfections such as transaction costs and information asymmetry, risk-sharing becomes costly, and it can even lead to financial crises. We emphasize the impact of risk-sharing on the real economy, especially the incentives for the insured party to take on excessive risks because the downsides are borne by the insurer (i.e., the moral hazard problem). We then review selective literature and summarize papers included in this issue, grouping them into three broad categories: risk identification, risk measurement, and risk management techniques. We conclude by outlining several streams of future research, including mechanisms to monitor excessive risk-taking, how to mitigate risk interconnectedness, and the potential applications of FinTech in risk sharing.

Keywords: risk sharing, incentive, information, risk management, systemic risk

JEL Classification: G14; G20

Suggested Citation

Liu, Mark H. and Wu, Wenfeng and Yu, Tong, Information, Incentives, and Effects of Risk-Sharing on the Real Economy (November 1, 2018). Available at SSRN: https://ssrn.com/abstract=3358153 or http://dx.doi.org/10.2139/ssrn.3358153

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 535 Fahuazhen Road
Shanghai, Shanghai 200052
China

Tong Yu (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

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