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Decentralized International Risk Sharing and Governmental Moral Hazard

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  • Wagner, W.B.

    (Tilburg University, Center for Economic Research)

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    Abstract

    This paper studies the issue of moral hazard in the presence of decentralized international risk sharing.In the model presented, risk sharing is achieved through macro markets (markets in which claims to the GDP of a country can be traded).Moral hazard arises for the following reason: if foreigners hold claims to domestic GDP due to risk sharing motives, the country will not receive the full benefit from its production anymore.This can motivate for example a tax on investment (which reduces production) or simply result in reduced governmental effort to increase productivity.We show in a two-country general equilibrium framework that the moral hazard problem does not lead to a reduction in the risk sharing (households hold half of world output).This results ultimately in a 100% tax on investment and creates a huge distortion.We conclude that unregulated macro markets pose a serious threat to world welfare.The analysis also raises concern about the desirability of decentralized risk sharing in general, in particular risk sharing through international trade of equity.

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    Bibliographic Info

    Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2000-92.

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    Date of creation: 2000
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    Handle: RePEc:dgr:kubcen:200092

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    Web page: http://center.uvt.nl

    Related research

    Keywords: moral hazard; international risk sharing;

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    References

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    4. Robert Shiller, 2004. "World Income Components: Measuring And Exploiting International Risk Sharing Opportunities," Yale School of Management Working Papers ysm151, Yale School of Management.
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    17. Brander, James A & Spencer, Barbara J, 1989. "Moral Hazard and Limited Liability: Implications for the Theory of the Firm," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 833-49, November.
    18. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May.
    19. Kahn, J.A., 1988. "Moral Hazard, Imperfect Risk-Sharing, And The Behavior Of Asset Returns," RCER Working Papers 152, University of Rochester - Center for Economic Research (RCER).
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