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World Income Components: Measuring and Exploiting Risk-Sharing Opportunities

  • Stefano G. Athanasoulis
  • Robert J. Shiller

A method is constructed for decomposing the variance of changes in incomes in the world into components, to indicate the most important risk-sharing opportunities among people of the world. A constant absolute risk premium (CARP) model, an intertemporal general-equilibrium model of the world, is presented to permit optimal contract design. For a contract designer maximizing a social welfare function, the optimal contracts maximize the equilibrium world real interest rate. Securities are defined in terms of eigenvectors of a transformed variance matrix. The method is applied using Penn World Table data on the G-7 countries, 1950-92.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 4 (September)
Pages: 1031-1054

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:4:p:1031-1054
Note: DOI: 10.1257/aer.91.4.1031
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