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Private information and business cycle risk sharing

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  • Alfred Duncan

Abstract

When individuals have private information about their own luck and in- come, the sharing of idiosyncratic risks is hampered by moral hazard. This friction also affects the optimal sharing of business cycle risks. Optimal allocations restrict the exposure of low wealth agents’ consumption to business cycle risk. This encourages truth-telling by high wealth agents who have a high tolerance for business cycle risk, thereby increasing the extent to which idiosyncratic risks can be shared. Implementation of these optimal allocations requires restrictions in the trade of securities contingent on business cycle outcomes.

Suggested Citation

  • Alfred Duncan, 2016. "Private information and business cycle risk sharing," Working Papers 2016_02, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2016_02
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    File URL: http://www.gla.ac.uk/media/media_439277_en.pdf
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    References listed on IDEAS

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    Cited by:

    1. Alfred Duncan & Charles Nolan, 2015. "Objectives and Challenges of Macroprudential Policy," Working Papers 2015_22, Business School - Economics, University of Glasgow.

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    More about this item

    Keywords

    Incomplete markets; business cycles; distribution.;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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