Abstract
Under certain conditions, risk-sharing and, in particular, insurance are mutually advantageous transactions. An ideal competitive market fcr risk-shifting is described; the payments received by individuals depend on the resolution of all the uncertainties at the time of the market, including, for example, damages to all parties, not just to the insured. In an ideal system, premiums depend only on the total damage in a given state, not on its distribution over individuals. In particular, mitigation measures are optimally induced. The differences between the ideal model of insurance and the real world are described, and some explanations offered.
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References
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Department of Economics, Stanford University
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Arrow, K.J. The theory of risk-bearing: Small and great risks. J Risk Uncertainty 12, 103–111 (1996). https://doi.org/10.1007/BF00055788
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DOI: https://doi.org/10.1007/BF00055788