Efficiency in Pure-Exchange Economies with Risk-Averse Monetary Utilities

TL;DR

This paper investigates Pareto efficiency in pure-exchange economies with risk-averse monetary utilities, providing characterizations, algorithms, and applications to risk-sharing markets with coherent risk measures.

Contribution

It offers a comprehensive analysis of Pareto optima under law-invariant monetary utilities, including new characterizations and algorithms for identifying optimal allocations.

Findings

Pareto optima exist and are comonotone.

Characterization of Pareto optima for law-invariant positively homogeneous utilities.

Closed-form solutions for Pareto optima with Yaari-Dual utilities.

Abstract

We study Pareto efficiency in a pure-exchange economy where agents' preferences are represented by risk-averse monetary utilities. These coincide with law-invariant monetary utilities, and they can be shown to correspond to the class of monotone, (quasi-)concave, Schur concave, and translation-invariant utility functionals. This covers a large class of utility functionals, including a variety of law-invariant robust utilities. We show that Pareto optima exist and are comonotone, and we provide a crisp characterization thereof in the case of law-invariant positively homogeneous monetary utilities. This characterization provides an easily implementable algorithm that fully determines the shape of Pareto-optimal allocations. In the special case of law-invariant comonotone-additive monetary utility functionals (concave Yaari-Dual utilities), we provide a closed-form characterization of Pareto optima. As an application, we examine risk-sharing markets where all agents evaluate risk through law-invariant coherent risk measures, a widely popular class of risk measures. In a numerical illustration, we characterize Pareto-optimal risk-sharing for some special types of coherent risk measures.