Information, Incentives, and Effects of Risk-Sharing on the Real Economy

Abstract In the absence of market imperfections, the mutuality principle leads to efficient risk sharing and the Pareto optimal asset allocations. With market imperfections such as transaction costs and information asymmetry, risk-sharing becomes costly, and it can even lead to financial crises. We emphasize the impact of risk-sharing on the real economy, especially the incentives for the insured party to take on excessive risks because the downsides are borne by the insurer or the ultimate risk taker. We review selective literature and summarize papers included in this issue, grouping them into three broad categories: risk identification, risk measurement, and risk management techniques. We conclude by outlining several streams of future research, including mechanisms to monitor excessive risk-taking, how to mitigate risk interconnectedness, and the potential applications of Fintech in risk sharing.