When does aggregation reduce uncertainty aversion?

Abstract

We study the problem of uncertainty sharing within a household: "risk sharing," in a context of Knightian uncertainty. A household shares uncertain prospects using a social welfare function. We characterize the social welfare functions such that the household is collectively less averse to uncertainty than each member, and satises the Pareto principle and an independence axiom. We single out the sum of certainty equivalents as the unique member of this family which provides quasiconcave rankings over risk-free allocations.

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