International Risk Sharing and Economic Growth
International risk-sharing which diversifies away income risk will reduced saving, with constant relative risk aversion. It growth arises from the external effects of human capital accumulation then reducing saving will reduced 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. We demonstrate these results in standard, representative-agent and overlapping-generations economies. In the same economies diversifying away rate-of-return risk also will reduce saving and growth rates if relative risk aversion exceeds one.
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