The Allocation of Individual Risks in Large Markets

  • Edmond Malinvaud
Part of the International Economic Association Series book series (IEA)


The modern theory of risk-bearing, as introduced by Arrow [1], Baudier [3] and Debreu [4], although fully general, gives no direct justification for a proposition that common sense suggests: an optimal allocation of resources typically requires that firms ought to maximise the expected value of their profits, and a contrario risk aversion at the level of the individual firm is detrimental to efficiency. It is very revealing that this proposition had to be argued by one of the founders of the modern theory against one of its adepts, namely by Arrow and Lind [2] against Hirshleifer [6]. One may also note that the modern approach does not directly exhibit the role of insurance for a proper allocation of resources. Such a role was often emphasised, for instance by F. Knight [7]. To a very large extent a system of insurance can replace the markets for contingent commodities, which were imagined by the theory but hardly exist in fact.


Individual Risk Modern Theory Pareto Optimality Large Market Expected Profit 
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  1. K. J. Arrow, ‘Le rôle des valeurs boursières pour la répartition la meilleure des risques’, in Econométrie Colloques Internationaux du Centre National de la Recherche Scientifique (Paris, 1953). English translation in Review of Economic Studies vol. XXXI (1964), pp. 91–6.Google Scholar
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    K. J. Arrow and R. C. Lind, ‘Uncertainty and the Evaluation of Public Investment Decision’, American Economic Review vol. LX (1970), pp. 364–78.Google Scholar
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    E. Baudier, ‘L’introduction du temps dans la théorie de l’équilibre général’, Cahiers Economiques (1954), pp. 9–16.Google Scholar
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    G. Debreu, Theory of Value (New York: John Wiley, 1959).Google Scholar
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    W. Hildenbrand, ‘Random Preferences and General Economic Equilibrium’, Journal of Economic Theory vol. III (1971), pp. 414–29.CrossRefGoogle Scholar
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    J. Hirshleifer, ‘Investment Decision under Uncertainty: Applications of the State-Preference Approach’, Quarterly Journal of Economics vol. LXXX (1966), pp. 252–77.CrossRefGoogle Scholar
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    F. Knight, Risk, Uncertainty and Profit (Boston: Houghton Mifflin), 1921.Google Scholar

Copyright information

© International Economic Association 1974

Authors and Affiliations

  • Edmond Malinvaud
    • 1
  1. 1.InseeParisFrance

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