IDEAS home Printed from https://ideas.repec.org/p/gla/glaewp/2016_02.html
   My bibliography  Save this paper

Private information and business cycle risk sharing

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.gla.ac.uk/media/media_439277_en.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Emmanuel Farhi & Iván Werning, 2016. "A Theory of Macroprudential Policies in the Presence of Nominal Rigidities," Econometrica, Econometric Society, vol. 84, pages 1645-1704, September.
    2. Weerachart T. Kilenthong & Robert M. Townsend, 2014. "A Market Based Solution to Price Externalities: A Generalized Framework," NBER Working Papers 20275, National Bureau of Economic Research, Inc.
    3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    4. Bruce D. Meyer & James X. Sullivan, 2013. "Consumption and Income Inequality and the Great Recession," American Economic Review, American Economic Association, vol. 103(3), pages 178-183, May.
    5. Harold L. Cole & Narayana R. Kocherlakota, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(3), pages 523-542.
    6. Charles T. Carlstrom & Timothy S. Fuerst & Matthias Paustian, 2016. "Optimal Contracts, Aggregate Risk, and the Financial Accelerator," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 119-147, January.
    7. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
    8. Fabrizio Perri & Joe Steinberg, 2012. "Inequality and redistribution during the Great Recession," Economic Policy Paper 12-1, Federal Reserve Bank of Minneapolis.
    9. Nikolov, Kalin, 2014. "Collateral amplification under complete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 80-93.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

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

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alfred Duncan & Charles Nolan, 2015. "Objectives and Challenges of Macroprudential Policy," Working Papers 2015_22, Business School - Economics, University of Glasgow.
    2. Candian, Giacomo & Dmitriev, Mikhail, 2020. "Optimal contracts and supply-driven recessions," Economics Letters, Elsevier, vol. 197(C).
    3. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    4. Jeanne, Olivier & Korinek, Anton, 2019. "Managing credit booms and busts: A Pigouvian taxation approach," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 2-17.
    5. Zaretski, Aliaksandr, 2021. "Financial constraints, risk sharing, and optimal monetary policy," MPRA Paper 110757, University Library of Munich, Germany.
    6. Kühl, Michael, 2017. "Bank capital, the state contingency of banks’ assets and its role for the transmission of shocks," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 260-284.
    7. repec:zbw:bofrdp:2016_003 is not listed on IDEAS
    8. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.
    9. Batini, Nicoletta & Melina, Giovanni & Villa, Stefania, 2019. "Fiscal buffers, private debt, and recession: The good, the bad and the ugly," Journal of Macroeconomics, Elsevier, vol. 62(C).
    10. Alfred Duncan & Charles Nolan, 2020. "Reform of the UK Financial Policy Committee," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(1), pages 1-30, February.
    11. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    12. Malmierca, María, 2023. "Optimal macroprudential and fiscal policy in a monetary union," Economic Modelling, Elsevier, vol. 122(C).
    13. Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-1438, April.
    14. Benes, Jaromir & Kumhof, Michael, 2015. "Risky bank lending and countercyclical capital buffers," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 58-80.
    15. repec:hal:spmain:info:hdl:2441/293qice3lj861rvos9ns14n0h0 is not listed on IDEAS
    16. Rivero-Leiva, David, 2022. "A note on the costly state verification problem with information gathering," Finance Research Letters, Elsevier, vol. 50(C).
    17. Junichi Fujimoto & Ko Munakata & Koji Nakamura & Yuki Teranishi, 2017. "Optimal Policy Analysis in a New Keynesian Economy with Credit Market Search," GRIPS Discussion Papers 16-30, National Graduate Institute for Policy Studies.
    18. Gilchrist, Simon & Schoenle, Raphael & Sim, Jae & Zakrajšek, Egon, 2023. "Financial heterogeneity and monetary union," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 21-40.
    19. Mathonnat, Clément & Williams, Benjamin, 2020. "Does more finance mean more inequality in times of crisis?," Economic Systems, Elsevier, vol. 44(4).
    20. Ottonello, Pablo, 2021. "Optimal exchange-rate policy under collateral constraints and wage rigidity," Journal of International Economics, Elsevier, vol. 131(C).
    21. Lewis, Vivien & Roth, Markus, 2018. "Interest rate rules under financial dominance," Journal of Economic Dynamics and Control, Elsevier, vol. 95(C), pages 70-88.
    22. Kollintzas, Tryphon & Tsoukalas, Konstantinos, 2015. "Bank and Sovereign Risk Interdependence in the Euro Area," CEPR Discussion Papers 10485, C.E.P.R. Discussion Papers.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gla:glaewp:2016_02. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Business School Research Team (email available below). General contact details of provider: https://edirc.repec.org/data/dpglauk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.