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.
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Ligon, E. (2018). Risk Sharing. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2357
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DOI: https://doi.org/10.1057/978-1-349-95189-5_2357
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