Optimum Allocation of Risk in a Market With Many Traders

Abstract

In a market with ‘many’ traders who bear risks, there is the possibility of pooling their independent risks and in this way to eliminate traders’ risks. There is a benefit from trade, and the way this benefit is divided between the traders depends on the system of exchange.

I am indebted to Professor D. Levhari and Professor M. E. Yaari for many comments and suggestions. I am grateful to the participants at the I.E.A. Workshop for many helpful remarks. In particular, F. Delbaen and J. Drèze supervised a systematic revision of the manuscript. However, I alone am responsible for any mistakes still present in the paper.