BILATERAL RISK SHARING WITH HETEROGENEOUS BELIEFS AND EXPOSURE CONSTRAINTS. Issue 1 (7th January 2020)

• Record Type: Journal Article
• Authors: Boonen, Tim J.; Ghossoub, Mario
• Is Part Of: ASTIN bulletin. Volume 50:Issue 1(2020)
• Page Start: 293
• Page End: 323
• Publication Date: 2020-01-07
• Subjects: Risk sharing, -- Pareto optimality, -- heterogeneous beliefs, -- probability distortion, -- exposure constraints; C02, -- D86, -- G22; Insurance -- Mathematics -- Periodicals; Risk (Insurance) -- Mathematics -- Periodicals; 368.01
• DOI: 10.1017/asb.2019.39
• Languages: English
• ISSNs: 0515-0361

Abstract

Abstract: This paper studies bilateral risk sharing under no aggregate uncertainty, where one agent has Expected-Utility preferences and the other agent has Rank-dependent utility preferences with a general probability distortion function. We impose exogenous constraints on the risk exposure for both agents, and we allow for any type or level of belief heterogeneity. We show that Pareto-optimal risk-sharing contracts can be obtained via a constrained utility maximization under a participation constraint of the other agent. This allows us to give an explicit characterization of optimal risk-sharing contracts. In particular, we show that an optimal risk-sharing contract contains allocations that are monotone functions of the likelihood ratio, where the latter is obtained from Lebesgue's Decomposition Theorem.