Risk Exchange As A Market Or Production Game
Source: Lund University
Risk exchange is considered here as a cooperative game with transferable utility. The set-up fits markets for insurance, securities and contingent endowments. When convoluted payoff is concave at the aggregate endowment, there is a price-supported core solution. Under variance aversion the latter mirrors the two-fund separation in allocating to each agent some sure holding plus a fraction of the aggregate. Many economic agents face risky endowments or commitments. Then, to mitigate ups and downs, it appears prudent to pool risks - often many and material in nature - and share them thereafter. For its viability the sharing had better be contingent, efficient and voluntary.