Individual and Collective Welfare in Risk Sharing with Many States

Abstract

We study efficient risk sharing among risk-averse agents in an economy with a large, finite number of states. Following a random shock to an initial agreement, agents may renegotiate. If they require a minimal utility improvement to accept a new deal, we show the probability of finding a mutually acceptable allocation vanishes exponentially as the state space grows. This holds regardless of agents' degree of risk aversion. In a two-agent multiple-priors model, we find that the potential for Pareto-improving trade requires that at least one agent's set of priors has a vanishingly small measure. Our results hinge on the ``shape does not matter'' message of high-dimensional isoperimetric inequalities.