Individual and Collective Welfare in Risk Sharing with Many States
Theoretical Economics
2026-02-23 v5 Computer Science and Game Theory
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.
Keywords
Cite
@article{arxiv.2401.07337,
title = {Individual and Collective Welfare in Risk Sharing with Many States},
author = {Federico Echenique and Farzad Pourbabaee},
journal= {arXiv preprint arXiv:2401.07337},
year = {2026}
}