Some Aspects of Risk Sharing in Nonclassical Environments

Abstract

Under the usual convexity assumptions concerning technology the tendency to diversity to reduce risk and the tendency to diversify to achieve technological efficiency reinforce each other. In nonclassical environments, where technology may be nonconvex, these two goals may be in conflict. We present several examples of this phenomenon and show how risk sharing arrangements can eliminate this conflict. We also consider the effects of introducing nonconcavities into the objective function of certain resource allocation problems.