Sharing Ambiguous Risks
23 Pages Posted: 22 Nov 2014
Date Written: November 20, 2014
Abstract
We analyse risk-sharing when individuals perceive ambiguity about future events. The main departure from previous work is that different individuals perceive ambiguity differently. We show that individuals fail to share risks for extreme events. This may provide an explanation why we do not observe individuals buying insurance for certain events like hurricanes or earthquakes and why many contracts contain an "act of God" clause, which allows non-performance if an unforeseen event occurs.
Keywords: ambiguity, risk-sharing, Choquet expected utility, act of God
JEL Classification: D01; D51; D81
Suggested Citation: Suggested Citation
Chakravarty, Surajeet and Kelsey, David, Sharing Ambiguous Risks (November 20, 2014). Available at SSRN: https://ssrn.com/abstract=2528499 or http://dx.doi.org/10.2139/ssrn.2528499
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