Riskiness, Risk Aversion, and Risk Sharing: Cooperation in a Dynamic Insurance Game

Arbeitspapier

This paper examines how cooperation in an insurance game depends on risk preferences and the riskiness of income. It considers a dynamic game where commitment is limited, and characterizes the level of cooperation as measured by the reciprocal of the discount factor above which perfect risk sharing is self-enforcing. When agents face no aggregate risk, there is more cooperation, if (i) the utility function is more concave, and if (ii) income is more risky considering a mean-preserving spread or an SSD deterioration. However, (ii) no longer holds when insurance can only be incomplete, because of the interplay of idiosyncratic and aggregate risk. In the case of exponential (isoelastic) utility, cooperation depends positively on both the coefficient of absolute (relative) risk aversion and the standard deviation (coefficient of variation), and is independent of mean income. This paper also relates the level of cooperation to informal insurance transfers and the smoothness of consumption when perfect risk sharing is not achieved.

Object Details

• ISBN: 978-963-9796-39-3
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IEHAS Discussion Papers ; No. MT-DP - 2008/21

Classification and Topics

• Classification: Wirtschaft ; Stochastic and Dynamic Games; Evolutionary Games; Repeated Games ; Information, Knowledge, and Uncertainty: General
• Subject: informal insurance ; limited commitment ; risk preferences ; riskiness ; comparative statics ; dynamic stochastic games ; Spieltheorie ; Dynamisches Spiel ; Versicherung ; Risikopräferenz ; Risiko ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Laczó, Sarolta
• Event: Veröffentlichung
• (who): Hungarian Academy of Sciences, Institute of Economics
• (where): Budapest
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/108139
• Last update: 10.03.2025, 11:43 AM CET