Research

Publications

Pairwise counter-monotonicity, Insurance: Mathematics and Economics, with Liyuan Lin and Ruodu Wang (arXiv)

Abstract: We systematically study pairwise counter-monotonicity, an extremal notion of negative dependence. A stochastic representation and an invariance property are established for this dependence structure. We show that pairwise counter-monotonicity implies negative association, and it is equivalent to joint mix dependence if both are possible for the same marginal distributions.  We find an intimate connection between pairwise counter-monotonicity and risk sharing problems for quantile agents. This result highlights the importance of this extremal negative dependence structure in optimal allocations for agents who are not risk averse in the classic sense.  

Job market paper

Negatively dependent optimal risk sharing with Liyuan Lin and Ruodu Wang

Abstract: We analyze the problem of optimally sharing risk using allocations that exhibit counter-monotonicity, the most extreme form of negative dependence. Counter-monotonic allocations take the form of either ``winner-takes-all" lotteries or ``loser-loses-all" lotteries, and we respectively refer to these (normalized) cases as jackpot or scapegoat allocations. Our main theorem, the counter-monotonic improvement theorem, states that for a given set of random variables that are either all bounded from below or all bounded from above, one can always find a set of counter-monotonic random variables such that each component is greater or equal than its counterpart in the convex order.  We show that Pareto optimal allocations, if they exist, must be jackpot allocations when all agents are risk seeking. We essentially obtain the opposite when all agents have discontinuous Bernoulli utility functions, as scapegoat allocations maximize the probability of being above the discontinuity threshold. We also consider the case of rank-dependent expected utility (RDU) agents and find conditions which guarantee that RDU agents prefer jackpot allocations. We provide an application for the mining of cryptocurrencies and show that in contrast to risk-averse miners, RDU miners with small computing power never join a mining pool. Finally, we characterize the competitive equilibria with risk-seeking agents, providing a first and second fundamental theorem of welfare economics where all equilibrium allocations are jackpot allocations.

Keywords: Pareto optimality, Risk sharing, Counter-monotonicity, Risk seeking, Rank-dependent expected utility, Cryptocurrency mining pools

Working papers*

Risk sharing, measuring variability, and distortion riskmetrics with Liyuan Lin and Ruodu Wang (Submitted, arXiv)

Abstract: We address the problem of sharing risk among agents with preferences modelled by a general class of comonotonic additive and law-based functionals that need not be either monotone or convex. Such functionals are called distortion riskmetrics, which include many statistical measures of risk and variability used in portfolio optimization and insurance. The set of Pareto-optimal allocations is characterized under various settings of general or comonotonic risk sharing problems. We solve explicitly Pareto-optimal allocations among agents using the Gini deviation, the mean-median deviation, or the inter-quantile difference as the relevant variability measures. The latter is of particular interest, as optimal allocations are not comonotonic in the presence of inter-quantile difference agents; instead, the optimal allocation features a mixture of pairwise counter-monotonic structures, showing some patterns of extremal negative dependence. 

Ex-post moral hazard and manipulation-proof contracts (Minor revision at Theory and Decision, Older version)

Abstract: We examine the trade-off between the provision of incentives to exert costly effort (ex-ante moral hazard) and the incentives needed to prevent the agent from manipulating the profit observed by the principal (ex-post moral hazard). Formally, we build a model of two-stage hidden actions where the agent can both influence the expected revenue of a business and manipulate its observed profit. We show that manipulation-proofness is sensitive to the interaction between the manipulation technology and the probability distribution of the stochastic output. The optimal contract is manipulation-proof whenever the manipulation technology is linear. However, a convex manipulation technology sometimes leads to contracts with manipulations in equilibrium. We identify a regularity condition guaranteeing that we can always find a manipulation technology for which the optimal contract is not manipulation-proof.

Envelope theorem and discontinuous optimization: the case of positioning choice problems (Older Version)

Abstract: We define a class of optimization problems for which the value function is always almost everywhere differentiable, even when the objective function is discontinuous in the choice sets. We call this class of optimization problem positioning choice problems as they have a straightforward interpretation of a choice of position. We show that the Dini superdifferential is always well-defined for maxima of positioning choice problems. This property allows stating first-order necessary conditions in terms of Dini superdifferential. We then prove our main result, an ``ad-hoc" envelope theorem for positioning choice problems. Lastly, we apply our results to the producer's problem of choosing an optimal level of capital when output is indivisible (Tobin's $q$) and to the design of mechanisms.

Insurance design and arson-type risks (Minor revision at Annals of Actuarial Science, Older version)

Abstract: We design the insurance contract when the insurer faces arson-type risks. The optimal contract must be manipulation-proof. It is therefore continuous, it has a bounded slope, and it satisfies the no-sabotage condition when arson-type actions are free. Any contract that mixes a deductible, coinsurance and an upper limit is manipulation-proof. We also show that the ability to perform arson-type actions reduces the insured's welfare as less coverage is offered in equilibrium. 

Work in progress

Dynamic climate decisions with Duanmu Haosui, Ali Khan and Ruodu Wang

Positioning choice problems: economic applications

Summary: We study further properties of positioning choice problems, a class of optimization problems we introduced in our previous article Positioning choice problems: the mathematics. We show that positioning choice problems can shed new light on various economic phenomena for which the objective functions' discontinuities are economically meaningful. These phenomena include fraud, production choices when inputs are indivisible (e.g. power plants), and consumer choices with indivisible goods (e.g. pairs of shoes).

We focus on economic problems for which we cannot readily use leading optimization tools. Such tooling includes the theory of envelope theorems for arbitrary choice sets [Milgrom & Segal (2002), Morand et al., (2018)], the Karush-Kuhn-Tucker theorem and the theory of monotone comparative statics [Quah (2007)].