Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2008/5: The Nash Bargaining Solution vs. Equilibrium in a Reinsurance Syndicate

Knut K. Aase ()
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Knut K. Aase: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: We compare the Nash bargaining solution in a reinsurance syndicate to the competitive equilibrium allocation, focusing on uncertainty and risk aversion. Restricting attention to proportional reinsurance treaties, we find that, although these solution concepts are very different, one may just appear as a first order Taylor series approximation of the other, in certain cases. This may be good news for the Nash solution, or for the equilibrium allocation, all depending upon one’s point of view. Our model also allows us to readily identify some properties of the equilibrium allocation not be shared by the bargaining solution, and vice versa, related to both risk aversions and correlations.

Keywords: Nash’s Bargaining Solution; Equilibrium; Pareto Optimal Risk Exchange; Reinsurance Treaties; Uncertainty; Risk Aversion; Correlations; Multinormal Universe

JEL-codes: C10; D81; G22

24 pages, May 30, 2008

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