Bilateral Risk Sharing with No Aggregate Uncertainty under Rank-Dependent Utility

26 Pages Posted: 20 Feb 2020

See all articles by Tim J. Boonen

Tim J. Boonen

University of Amsterdam

Mario Ghossoub

University of Waterloo

Date Written: January 24, 2020

Abstract

This paper studies bilateral risk-sharing with no aggregate uncertainty, when agents maximize rank-dependent utilities. We characterize the structure of Pareto optimal risk-sharing contracts in full generality. We then derive a necessary and sufficient condition for Pareto optima to be no-betting allocations (i.e., deterministic allocations), thereby answering the question of when sunspots do not exist in this economy. This condition depends only on the probability weighting functions of the two agents, and not on their (concave) utility functions.

Keywords: Risk Sharing, Pareto Optimality, Sunspots, Rank-Dependent Utility

JEL Classification: C02, D86, G22

Suggested Citation

Boonen, Tim J. and Ghossoub, Mario, Bilateral Risk Sharing with No Aggregate Uncertainty under Rank-Dependent Utility (January 24, 2020). Available at SSRN: https://ssrn.com/abstract=3524926 or http://dx.doi.org/10.2139/ssrn.3524926

Tim J. Boonen (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profiel/b/o/t.j.boonen/t.j.boonen.html

Mario Ghossoub

University of Waterloo ( email )

Dept. of Statistics & Actuarial Science
200 University Ave. W.
Waterloo, Ontario N2L 3G1
Canada

HOME PAGE: http://uwaterloo.ca/scholar/mghossou

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