Protecting Losers: Optimal Diversification, Insurance, and Trade Policy
This paper derives a portfolio diversification rationale for a trade policy regime that insures returns to nondiversifiable human capital investment. In the absence of complete insurance markets for human capital, the decentralized equilibrium is characterized by excessive specialization. The socially optimal investment portfolio entails diversification for the reasons familiar from the CAPM. By credibly promising to protect losers ex post, the government can achieve the optimally diversified investment pattern. In contrast to previous results, two instruments are sufficient to achieve both efficient reallocation and full insurance when human capital is mobile at some cost, due to the endogeneity of the initial investment decision.
|Date of creation:||Jul 1991|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lawrence F. Katz & Lawrence H. Summers, 1989.
"Can Interindustry Wage Differentials Justify Strategic Trade Policy?,"
in: Trade Policies for International Competitiveness, pages 85-124
National Bureau of Economic Research, Inc.
- Lawrence F. Katz & Lawrence H. Summers, 1988. "Can Inter-Industry Wage Differentials Justify Strategic Trade Policy?," NBER Working Papers 2739, National Bureau of Economic Research, Inc.
- Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 1-12, January.
- Stiglitz, Joseph E, 1981. "Pareto Optimality and Competition," Journal of Finance, American Finance Association, vol. 36(2), pages 235-51, May.
- Flemming, John S & Turnovsky, Stephen J & Kemp, Murray C, 1977. "On the Choice of Numeraire and Certainty Price in General Equilibrium Models of Price Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 573-83, October.
- Kenneth L. Judd, 1984. "Efficiency, Adverse Selection, and Production," Discussion Papers 606, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Turnovsky, Stephen J, 1974. "Technological and Price Uncertainty in a Ricardian Model of International Trade," Review of Economic Studies, Wiley Blackwell, vol. 41(2), pages 201-17, April.
- Grossman, Gene M & Shapiro, Carl, 1982. "A Theory of Factor Mobility," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 1054-69, October.
- Jonathan Eaton & Harvey Rosen, 1979.
"Taxation, Human Capital and Uncertainty,"
497, Princeton University, Department of Economics, Industrial Relations Section..
- Eaton, Jonathan, 1979. "The Allocation of Resources in an Open Economy with Uncertain Terms of Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 391-403, June.
- Pincus, J J, 1975. "Pressure Groups and the Pattern of Tariffs," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 757-78, August.
- Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3773. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.