Aggregate Risk and the Pareto Principle
In the evaluation of public policies, a crucial distinction is between plans that involve purely idiosyncratic risk and policies that generate aggregate, correlated risk. While natural, this distinction is not captured by standard utilitarian aggregators. In this paper we revisit Harsanyi’s (1955) celebrated theory of preferences aggregation and develop a parsimonious generalization of utilitarianism. The theory we propose can capture sensitivity to aggregated risk, it is apt for studying large populations and is characterized by two simple axioms of preferences aggregation.
Nabil Al-Najjar, Luciano Pomatto
Al-Najjar, Nabil, and Luciano Pomatto. 2018. Aggregate Risk and the Pareto Principle.