Optimal risk sharing, equilibria, and welfare with empirically realistic risk attitudes
This paper examines optimal risk sharing. It brings in empirical realism, reckoning with the risk seeking found empirically. We provide results on Pareto optimality, competitive equilibria, utility frontiers, and the first and second theorems of welfare. Empirical studies have found prevailing risk seeking in several subdomains. Thus, as a first step to increase empirical realism, we allow for some risk-seeking agents, still assuming expected utility. Yet more empirical realism is obtained by generalizing expected utility and allowing agents' attitudes to combine risk aversion in some domains with risk seeking in others. We provide results and show directions for future research.
econ.TH↗