Risk Sharing in a Network of Transactions: A Public Information Case

Abstract

In this paper we present a model of a network or an arrangement of transactions that involve a risky transfer of assets. Transactions are generated endogenously. There is a risk in asset transfers and we are concerned with the question of optimal risk management in such a network. Assets in this paper may well be usual commodities and not limited to financial assets. If there is some risk of failure in a transfer from one party to another, should the transfer be done through that arrangement? If so, then what considerations are relevant to determining whether third parties ought to share that risk? Are there conditions under which the general public or the government (in the case of a private arrangement) ought to bear some risk and, if so, what level of compensation would it be appropriate for them to receive? In the present paper, we address these questions by analyzing a schematic, formal, model of a network of transactions.