The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Risk Sharing

  • Ethan Ligon
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2357

Abstract

Agents increase their expected utility by using state-contingent transfers to share risk; many institutions seem to play an important role in permitting such transfers. If agents are suitably risk-averse, then in the absence of any frictions the benchmark Arrow–Debreu model predicts that all risk will be shared, so that idiosyncratic shocks will have no effect on individuals; we call this full risk sharing. Real-world tests of full risk sharing tend to reject it; accordingly, researchers have devised models incorporating various frictions to try to explain the partial risk sharing evident in the data.

Keywords

Arrow–Debreu economy Commitment Credit Euler equations Financial markets Full risk sharing Idiosyncratic risk Insurance Lagrange multipliers Pareto efficiency Partial risk sharing Permanent-income hypothesis Risk aversion Risk sharing Separability Sharecropping State-contingent transfers von Neumann–Morgenstern preferences von Neumann–Morgenstern utility functions 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Ethan Ligon
    • 1
  1. 1.