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Sharing Risk Within and Across Countries: The Role of Labor Market Institutions

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Abstract

This paper studies the effect of labor market institutions on within- and cross-country risk-sharing using a model of international trade in risky assets modified to include a subset of agents, labor-owners, who do not access financial markets, and employment security provisions. Labor market institutions, by promoting within-country risk-shifting arrangements between agents with or without access to financial markets, reduce the fluctuations of non-tradable labor incomes and amplify the fluctuations of capital incomes. Capital flows become more volatile across countries, and if the configuration of labor markets differs across countries, capital-owners bear the burden of systematic undiversifiable world aggregate uncertainty.

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File URL: http://www.unito.it/unitoWAR/ShowBinary/FSRepo/D031/Allegati/WP2013Dip/WP_28_2013.pdf
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Paper provided by University of Turin in its series Department of Economics and Statistics Cognetti de Martiis. Working Papers with number 201328.

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Length: 24 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:uto:dipeco:201328

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  1. Giuseppe Bertola & Anna Lo Prete, 2013. "Finance, governments, and trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 149(2), pages 273-294, June.
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