Abstract:

In this talk, we look into a bilateral risk-sharing problem where both agents are rank-dependent utility maximizers. The market restricts risk allocations to be comonotonic. We first characterize the optimal risk allocation in an implicit way through the calculus of variations. Then, based on the element-wise maximizer to the problem, we partition the support of loss into disjoint pieces and unveil the explicit structure of the optimal risk allocation over each piece. Our methodology is efficient in reducing the dimension of such kind of problem, and we show optimal solutions under only mild assumptions. We show the applicability of our results in two examples where both agents use exponential utilities and use convex power or inverse-S-shaped probability weighting functions. This is a joint work with Tim Boonen of University of Amsterdam.