Dynamics and Heterogeneity of Inter‐ and Intranational Risk Sharing

This study extends the empirical model of incomplete risk sharing developed by Crucini () by allowing unequal income pooling and explores the implications of using an alternative measure for aggregate risk. Based on samples from Canadian provinces, G‐7, and OECD countries spanning the years 1961–2008, we show that the empirical procedure used by Crucini tends to overstate the average degree of risk sharing and understate the dispersion of risk sharing, when compared to our unequal income pooling model. The empirical results from our unequal pooling model show that (i) the degree and dispersion of risk sharing across Canadian provinces, G‐7 countries, and OECD countries remain stable over time; (ii) the degree of risk sharing across Canadian provinces is higher than that across the G‐7 and OECD countries; and (iii) the degree of risk sharing seems positively related to equity and trade diversification.