Pareto-Optimal Investments and Contracting for Non-linear Payoffs

Abstract

This paper explores financial and insurance contracts with non-linear payoffs by combining optimal contract design and dynamic portfolio planning. It avoids upfront parameter fixation, seeking to simultaneously optimize contract parameters and investment strategies in a Pareto-optimal manner. This approach sheds light on the implications of dynamic investment strategies, especially in contracts with non-linear elements like caps or investment guarantees, aiming to enhance their design and potential for Pareto improvements.

Keywords: Contracts with non-linear elements, dynamic portfolio planning, non-concave utility maximization, Pareto optimality

JEL Classification: G11, G23