Individual and Collective Welfare in Risk Sharing with Many States
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arXiv
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| Format: | Preprint |
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2024
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| _version_ | 1866915808222904320 |
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| author | Echenique, Federico Pourbabaee, Farzad |
| author_facet | Echenique, Federico Pourbabaee, Farzad |
| contents | We study efficient risk sharing among risk-averse agents in an economy with a large, finite number of states. Following a random shock to an initial agreement, agents may renegotiate. If they require a minimal utility improvement to accept a new deal, we show the probability of finding a mutually acceptable allocation vanishes exponentially as the state space grows. This holds regardless of agents' degree of risk aversion. In a two-agent multiple-priors model, we find that the potential for Pareto-improving trade requires that at least one agent's set of priors has a vanishingly small measure. Our results hinge on the ``shape does not matter'' message of high-dimensional isoperimetric inequalities. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2401_07337 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Individual and Collective Welfare in Risk Sharing with Many States Echenique, Federico Pourbabaee, Farzad Theoretical Economics Computer Science and Game Theory 91B50 J.4 We study efficient risk sharing among risk-averse agents in an economy with a large, finite number of states. Following a random shock to an initial agreement, agents may renegotiate. If they require a minimal utility improvement to accept a new deal, we show the probability of finding a mutually acceptable allocation vanishes exponentially as the state space grows. This holds regardless of agents' degree of risk aversion. In a two-agent multiple-priors model, we find that the potential for Pareto-improving trade requires that at least one agent's set of priors has a vanishingly small measure. Our results hinge on the ``shape does not matter'' message of high-dimensional isoperimetric inequalities. |
| title | Individual and Collective Welfare in Risk Sharing with Many States |
| topic | Theoretical Economics Computer Science and Game Theory 91B50 J.4 |
| url | https://arxiv.org/abs/2401.07337 |