Pooling Risk Among Countries∗
نویسندگان
چکیده
We present a model where the enforcement of international risk sharing contracts is costly. With non diversifiable enforcement costs, welfare is not necessarily maximized for perfect worldwide risk sharing. Some groupings, or “pools” of countries can deliver higher welfare, with higher diversification gains net of enforcement costs. We construct an exhaustive list of such pools of countries. For each pool, we compute the volatility of poolwide consumption and Gross Domestic Product growth, and compare it with the volatility in each country individually. From the difference, we infer the diversification and welfare gains — gross of enforcement costs— associated with risk sharing for each pool. Welfare gains increase quickly with the size of the pool. Groupings of as few as seven countries deliver two-thirds of the maximum obtained with full worldwide integration. They are composed of heterogeneous countries, and are typically not observed, presumably because enforcement costs are large. A contrario, the few risk sharing agreements we do observe usually have a regional dimension, high trade, and presumably low diversification gains, but low enforcement costs. We conclude large welfare gains remain untapped because the enforcement of international risk sharing is costly.
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