The Dynamics of Optimal Risk Sharing
نویسندگان
چکیده
In this paper we study a dynamic contracting problem of optimal risk-sharing between a principal and an agent who invest in a common constant-returns-to-scale risky venture. Investment flow-returns follow a geometric Brownian motion and the two agents’ risk-preferences are represented by additively separable utility functions exhibiting constant relative risk-aversion (CRRA). Principal and agent have different coefficients of relative risk-aversion. In any time period they invest their wealth in the risky venture and optimally share the underlying return risk and termination risk. When the project ends the two individuals divide the accumulated proceeds as specified in the risk-sharing contract and consume their final accumulated wealth. The paper characterizes risk-sharing formulae that approximate the optimal risk-sharing rules.
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