Risk Exchange under EUUP

Abstract

In this paper, we consider an equilibrium insurance premium and risk exchange in a pure exchange economy with ambiguity or Knightian uncertainty. Each agent’s preference is represented by the expected utility with uncertainty probability (EUUP) theory. The Bühlmann’s economic premium principle is generalized under EUUP. Contrary to the existing models, our principle under uncertainty is given unanimously and can be calculated more easily and explicitly. Through comparative statics, we show that insurance transactions occur and demand for insurance is not always comonotonic due to the difference in the degree of ambiguity aversion even if all of the agents in the economy are ambiguity averse or ambiguity loving.