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Group Formation
, 2012
"... A rich literature seeks to explain the distinctive features of equilibrium institutions arising in risky environments which lack formal insurance and credit markets. I develop a theory of endogenous matching between heterogeneously risk-averse individuals who, once matched, choose both the riskiness ..."
Abstract
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A rich literature seeks to explain the distinctive features of equilibrium institutions arising in risky environments which lack formal insurance and credit markets. I develop a theory of endogenous matching between heterogeneously risk-averse individuals who, once matched, choose both the riskiness of the income stream they face (ex ante risk management) as well as how to share that risk (ex post risk management). I …nd a clean condition on the fundamentals of the model for unique positive-assortative and negative-assortative matching in risk attitudes. From this, I derive an intuitive falsi…ability condition, discuss support for the theory in existing empirical work, and propose an experimental design to test the theory. Finally, I demonstrate the policy importance of understanding informal insurance as the risk-sharing achieved within the equilibrium network of partnerships, rather than within a single, isolated partnership. A hypothetical policy which reduces aggregate risk is a strict Pareto improvement if the matching is unchanged, but can be seen to harm the most risk-averse individuals and to exacerbate inequality when the endogenous network response is taken into account: the least risk-averse individuals abandon their roles as informal insurers in favor of entrepreneurial partnerships.
Fair management of social risk∗
, 2014
"... We provide a general method for extending fair social preferences defined for riskless economic environments to the context of risk and uncertainty. We apply the method to the problems of managing unemployment al-lowances (in the context of macroeconomic fluctuations) and catastrophic risks (in the ..."
Abstract
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We provide a general method for extending fair social preferences defined for riskless economic environments to the context of risk and uncertainty. We apply the method to the problems of managing unemployment al-lowances (in the context of macroeconomic fluctuations) and catastrophic risks (in the context of climate change). It requires paying attention to individuals ’ risk attitudes and rationality properties of social preferences, revisiting basic ideas from Harsanyi’s seminal work (Harsanyi, 1955). The social preferences that we obtain do not in general take the form of an ex-pected utility criterion, but they always satisfy statewise dominance. We also show how non-expected utility individual preferences can be accom-modated in the approach.
Documents de Travail du Centre d’Economie de la Sorbonne
, 2014
"... Fair management of social risk ..."