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30-12-2022
Business

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Consider an economy with n risk-averse agents in which each agent possesses a non-tradeable zero-mean background risk i, for i 1,.., n. We further suppose that each e is independent of the aggregate tradeable wealth z(3) and that all agents have quadratic utility functions. (a) Show that Pareto-efficient allocation of the aggregate tradeable risk z(3) is not affected by the presence of the background risks (b) Would the conclusion of (a) be true if all agents had CRRA preferences with the same degree of relative risk aversion? Why or why not?

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