Efficient Risk-Sharing Rules with Heterogeneous Risk Attitudes and Background Risks

32 Pages Posted: 19 May 2006

See all articles by Christoph Kuzmics

Christoph Kuzmics

University of Graz - Department of Economics

Chiaki Hara

Kyoto University - Institute of Economic Research

James Huang

Lancaster University - Department of Accounting and Finance

Date Written: May 18, 2006

Abstract

In an exchange economy in which there is a complete set of markets for macroeconomic risks but no market for idiosyncratic risks, we consider how the efficient risk-sharing rules for the macroeconomic risk are affected by the heterogeneity in the consumers' risk attitudes and idiosyncratic risks. We provide sufficient conditions under which an idiosyncratic risk increases cautiousness (the derivative of the reciprocal of the absolute risk aversion), the determinant of the curvatures of the efficient risk-sharing rules. While the curvature of the risk-sharing rules at high consumption levels are governed by the consumers' risk attitudes, the curvature at low consumption levels depend not only on the risk attitudes but also on the lower tail distributions of the idiosyncratic risks.

Keywords: efficient risk-sharing rules, relative risk aversion, absolute risk tolerance, Inada condition, idiosyncratic risks, background risks, incomplete markets

JEL Classification: D51, D58, D81, G11, G12, G13

Suggested Citation

Kuzmics, Christoph and Hara, Chiaki and Huang, James Xiaoping, Efficient Risk-Sharing Rules with Heterogeneous Risk Attitudes and Background Risks (May 18, 2006). Available at SSRN: https://ssrn.com/abstract=903165 or http://dx.doi.org/10.2139/ssrn.903165

Christoph Kuzmics (Contact Author)

University of Graz - Department of Economics ( email )

Universitaetsstrasse 15
RESOWI - F4
Graz, 8010
Austria

Chiaki Hara

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
Japan

James Xiaoping Huang

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
01 5245 93633 (Phone)
01 5248 47321 (Fax)

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