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Dynamic Stackelberg Game with Risk-Averse Players: Optimal Risk-Sharing under Asymmetric Information

By Dan Protopopescu

Abstract

The objective of this paper is to clarify the interactive nature of the leader-follower relationship when both players are endogenously risk-averse. The analysis is placed in the context of a dynamic closed-loop Stackelberg game with private information. The case of a risk-neutral leader, very often discussed in the literature, is only a borderline possibility in the present study. Each player in the game is characterized by a risk-averse type which is unknown to his opponent. The goal of the leader is to implement an optimal incentive compatible risk-sharing contract. The proposed approach provides a qualitative analysis of adaptive risk behavior profiles for asymmetrically informed players in the context of dynamic strategic interactions modelled as incentive Stackelberg games.Dynamic stochastic Stackelberg game, optimal path, closed-loop control, endogenous risk-aversion, adaptive risk management, optimal risk-sharing.

OAI identifier: oai:RePEc:aub:autbar:797.09

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