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The paper studies an oligopolistic equilibrium model of financial agents whoaim to share their random endowments. The risk-sharing securities and theirprices are endogenously determined as the outcome of a strategic game playedamong all the participating agents. In the complete-market setting, eachagent's set of strategic choices consists of the security payoffs and thepricing kernel that are consistent with the optimal-sharing rules; while in theincomplete setting, agents respond via demand functions on a vector of giventradeable securities. It is shown that at the (Nash) risk-sharing equilibrium,the sharing securities are suboptimal, since agents submit for sharingdifferent risk exposures than their true endowments. On the other hand, theNash equilibrium prices stay unaffected by the game only in the special case ofagents with the same risk aversion. In addition, agents with sufficiently lowerrisk aversion act as predatory traders, since they absorb utility surplus fromthe high risk averse agents and reduce the efficiency of sharing. The mainresults of the paper also hold under the generalized models that allow thepresence of noise traders and heterogeneity in agents' beliefs.

The Effect of Market Power on Risk-Sharing