- Nash equilibria of Over-The-Counter bargaining for insurance risk redistributions: the role of a regulator
- European Journal of Operational Research
- Volume | Issue number
- 250 | 3
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
This paper proposes a way to optimally regulate bargaining for risk redistributions. We discuss the strategic interaction between two firms, who trade risk Over-The-Counter in a one-period model. Novel to the literature, we focus on an incomplete set of possible risk redistributions. This keeps the set of feasible contracts simple. We consider catastrophe and longevity risk as two key examples. The reason is that the trading of these risks typically occurs Over-The-Counter, and that there are no given pricing functions. If the set of feasible strategies is unconstrained, we get that all Nash equilibria are such that no firm benefits from trading. A way to avoid this, is to restrict the strategy space a priori. In this way, a Nash equilibrium that is interesting for both firms may exist. The intervention of a regulator is possible by restricting the set of feasible strategies. For instance, a firm has to keep a deductible on its prior risk. We characterize optimal regulation by means of Nash bargaining solutions.
- go to publisher's site
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.