Security

Risk Taking Under Heterogenous Risk Sharing

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Executive Summary

The authors revisit the common view that risk sharing enhances risk taking in the context of heterogeneous risk sharing in a small economy. Under low volumes of transfers, they express individual risk level in terms of Bonacich measure. They find that heterogeneity combined to strategic interaction imply that risk sharing enhances risk taking only in average. However, under high transfer volumes, risk sharing may reduce risk taking. They also provide conditions under which agents under or over invest with respect to the risk allocation maximizing the sum of profits.

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