Investment and Insurance in an Economic Union
The presence of private information limits the extent of risk sharing in an economic union. Studying the optimal dynamic arrangement with these impediments is particularly important because of its potential effect on investment and the distribution of power between its members. This paper studies this problem in a neoclassical growth model with two countries. One of the countries faces "demand" shocks that are privately observed. The economic union must decide how much help they should provide to this country and how to finance those transfers: Should they come from a reduction of investment or of consumption of the other member? Importantly, the viability of the Economic Union may be at risk if private information imposes large welfare losses. To address these questions, an alternative recursive method to solve for the optimal allocation in this context is developed. The results suggest that, in spite of private information, it is still (constrained) optimal to provide some insurance but at the cost of a reduction in the welfare of the country helped. The welfare costs of private information are non-monotone in the size of the country with private information.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
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.:
- Sonia Di Giannatale Menegalli & Gian Luca Clementi & Thomas Cooley, 2008.
"A Theory of Firm Decline,"
DTE 445, CIDE, División de Economía.
- Gian Luca Clementi & Thomas Cooley & Sonia Di Giannatal, 2010. "A Theory of Firm Decline," Working Papers 2010.88, Fondazione Eni Enrico Mattei.
- Gian Luca Clementi & Thomas F. Cooley & Sonia B. Di Giannatale, 2010. "A Theory of Firm Decline," Levine's Working Paper Archive 661465000000000149, David K. Levine.
- Gian Luca Clementi & Thomas F. Cooley & Sonia Di Giannatale, 2009. "A Theory of Firm Decline," NBER Working Papers 15192, National Bureau of Economic Research, Inc.
- Gian Luca Clementi & Thomas Cooley & Sonia Di Giannatale, 2008. "A Theory of Firm Decline," Working Paper Series 33-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
- Gian Luca Clementi & Thomas F. Cooley & Sonia DiGiannatale, 2009. "A Theory of Firm Decline," Working Papers 09-05, New York University, Leonard N. Stern School of Business, Department of Economics.
- Mele, Antonio, 2010.
"Repeated moral hazard and recursive Lagrangeans,"
21741, University Library of Munich, Germany.
- Doepke, Matthias & Townsend, Robert M., 2006.
"Dynamic mechanism design with hidden income and hidden actions,"
Journal of Economic Theory,
Elsevier, vol. 126(1), pages 235-285, January.
- Doepke, Matthias & Townsend, Robert M, 2004. "Dynamic Mechanism Design with Hidden Income and Hidden Auctions," CEPR Discussion Papers 4455, C.E.P.R. Discussion Papers.
- Matthias Doepke & Robert M. Townsend, 2002. "Dynamic Mechanism Design With Hidden Income and Hidden Actions," UCLA Economics Working Papers 818, UCLA Department of Economics.
- Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
- Espino, Emilio, 2005.
"On Ramsey's conjecture: efficient allocations in the neoclassical growth model with private information,"
Journal of Economic Theory,
Elsevier, vol. 121(2), pages 192-213, April.
- Espino, Emilio, 2004. "On Ramsey's Conjecture: Efficient Allocations in the Neoclassical Growth Model with Private Information," Economics Series 154, Institute for Advanced Studies.
- Aubhik Khan & B. Ravikumar, 1999.
"Growth and risk-sharing with private information,"
99-12, Federal Reserve Bank of Philadelphia.
When requesting a correction, please mention this item's handle: RePEc:red:sed012:1176. 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: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.