Risk-sharing contracts with asymmetric information

We examine how risk-sharing is impacted by asymmetric information on the probability dis-tribution of wealth. We define the optimal incentive compatible agreements in a simple two-agent model with two levels of wealth. When there is complete information on the probability of the dif-ferent outcomes, the resulting allocation satisfies the mutuality principle (which states that every-one’s final wealth depends only upon the aggregate wealth of the economy). This is no longer true when agents have private information regarding their probability distribution of wealth. Asym-metry of information (i) makes ex-post equal sharing unsustainable between two low risk agents and (ii) induces exchanges when agents have the same realization of wealth