A general equilibrium interpretation of damage-contingent securities

Cass, Chichilnisky, and Wu (1996) show in an endowment economy that mutual insurance and securities contingent on aggregate states support optimal ris k-sharing. We extend their result to a model with production in which risk is endogenous and beliefs about the aggregate state vary across individuals . We use the model to interpret the role of new securities that are conting ent on measures of total damage from natural catastrophes. Plausible specia l cases of the model predict the trade pattern in such securities across di verse regions and predict that such securities will not represent actuarial ly fair gambles.