Risk-sharing Capacity: Markets versus Households

Abstract

We introduce uncertainty in our general equilibrium model with multi-member groups. Risk averse agents can attempt to insure themselves through markets or through mutual insurance within a multi-member group by pooling resources within the group. We present a series of examples that shed some light on various possibilities.

• Markets only, households only or both together may contribute to insurance.

• Individuals may not be fully insured under aggregate risk even if the outcome is efficient.

• Whether an institution provides insurance may depend on the presence or absence of other insurance opportunities.