Capital-Allocation-Induced Risk Sharing

2026-03-27

AI Summary

This work proposes a novel approach to risk sharing grounded in capital allocation principles, departing from traditional frameworks that rely on economic equilibrium and Pareto optimality. By randomizing classical capital allocation rules, the study establishes a formal analogy between these rules and risk-sharing mechanisms, thereby inducing a new class of risk-sharing schemes. This approach marks the first integration of randomized capital allocation into the risk allocation framework, circumventing the conventional dependence on economic equilibrium assumptions. In doing so, it expands the methodological paradigm for constructing risk-sharing arrangements and enriches the theoretical foundations of the existing literature.

Abstract

This article proposes a new class of risk-sharing rules by exploring the relationship between capital allocation and risk sharing. While the former is concerned with ex-ante allocating capitals to different lines of business within a corporation based on the relationship among the individual risks, often also through the aggregate risk, the latter is an arrangement which collects risks from and allocates them to, also ex-ante, a group of participants. Drawing on this analogy, we introduce a novel idea of inducing risk-sharing rules by randomizing existing capital allocation principles. Such an approach derives new risk-sharing rules complementing known results in the literature, which were largely based on economic principles and Pareto optimality.

Problem

• risk sharing
• capital allocation
• risk management
• financial risk
• Pareto optimality

Innovation

• risk sharing
• capital allocation
• randomization
• Pareto optimality
• ex-ante allocation