Optimal risk sharing

Abstract

Optimal risk sharing is considered from the perspective of the risk sharing model introduced by Karl Borch in the late 50ies.

First we introduce, in a modern setting, the main concepts from this theory. These we apply on the risk sharing problem between an insurer and an insurance customer. We motivate the development through a simple example, illustrating some fine points of this theory.

In order to explain deductibles, we separately introduce (i) costs, and (ii) moral hazard in the neoclassical model , the latter case also illustrated by an example.