- Egalitarian Risk Sharing under Liquidity Constraints
- Amsterdam: CeNDEF
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
Undertaking joint projects in practice involves a lot of uncertainty, especially when it comes to the final costs. This paper addresses the problem of sharing realized costs by the participants, subject to their indvidual liquidity constraints. If all cost levels can be accounted for, and it the individual agent's liquidity is at least the fair share of the average risk-adjusted costs, then it is possible to find an egalitarian solution to this problem. We characterize this rule by means of properties that are defined for solutions in the context of rationingn problems. The rule we propose is reminiscent to the constrained equal award rule in rationing models. First, there is a vector of transfers allocated to the agents if there are no costs of the project. The constrained equal award rule is applied to the variable component, i.e., when the liquidities are corrected for the transfers.
- November 19, 2014
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