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arXiv · 2401.07337

Individual and Collective Welfare in Risk Sharing with Many States

Federico Echenique·Farzad Pourbabaee
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Abstract

We study efficient risk sharing among risk-averse agents in an economy with a large, finite number of states. Following a random shock to an initial agreement, agents may renegotiate. If they require a minimal utility improvement to accept a new deal, we show the probability of finding a mutually acceptable allocation vanishes exponentially as the state space grows. This holds regardless of agents' degree of risk aversion. In a two-agent multiple-priors model, we find that the potential for Pareto-improving trade requires that at least one agent's set of priors has a vanishingly small measure. Our results hinge on the ``shape does not matter'' message of high-dimensional isoperimetric inequalities.

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Federico Echenique, Farzad Pourbabaee. 2024-01-14. Individual and Collective Welfare in Risk Sharing with Many States. https://arxiv.org/abs/2401.07337

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