International Risk Sharing and Economic Growth
International risk sharing that diversifies away income risk will reduce saving with constant relative risk aversion. If growth arises from the external effects of human capital accumulation, then reducing saving will reduce growth. Welfare also may fall with risk sharing because endogenous growth with external effects of capital accumulation typically implies a competitive equilibrium growth rate already less than the optimal growth rate. The authors demonstrate these results in a standard, representative-agent economy. Diversifying away rate-of-return risk also will reduce saving and growth rates if relative risk aversion exceeds one, but this diversification always increases welfare. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Volume (Year): 35 (1994)
Issue (Month): 3 (August)
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