Optimal risk sharing, equilibria, and welfare with empirically realistic risk attitudes

This paper examines optimal risk sharing for empirically realistic risk attitudes, providing results on Pareto optimality, competitive equilibria, utility frontiers, and the first and second theorems of welfare. Contrary to common theoretical assumptions, empirical studies find prevailing risk seeking in particular subdomains, in particular for losses. We first allow for some risk-seeking agents, still assuming expected utility. Yet more empirical realism is obtained by allowing agents to be neither risk averse nor risk seeking and by generalizing expected utility. Here we provide first results, pleading for future research. Our main new tool is a counter-monotonic improvement theorem.