Risk Allocation and Information: Some Recent Theoretical Developments

Abstract

Markets are means for the mutually beneficial exchange of goods and for inducing the transformation of goods from one form to another. We will take it as axiomatic that individuals are risk-averse, so that the bearing of risks is a cost and the shifting of risks to others a good. The existence of insurance, common stocks, and many other devices testifies to the validity of the assumption of risk aversion, though it must be admitted that gambling and perhaps some speculative activity might be regarded as evidence for risk preference in some contexts.