The Feasible Gains from International Risk Sharing

28 Pages Posted: 18 Jun 2001

See all articles by Sylvester C. W. Eijffinger

Sylvester C. W. Eijffinger

Tilburg University (CentER) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: 2003

Abstract

The literature has documented an international risk sharing puzzle: there seem to be substantial unexploited gains from international risk sharing. In this paper we analyze the relative contributions of the intertemporal and the cross-sectional smoothing channel to this puzzle. We find that the unexploited gains from intertemporal smoothing are large (2.8% for the representative G7 country during 1956-1992). By contrast, the gains from cross-sectional smoothing, once complete intertemporal smoothing has been achieved, seem to be small. Furthermore, we find that intertemporal gains are easier to achieve than cross-sectional gains: their implementation causes less incentive problems (moral hazard and default) and they can to a large extent be realized through existing financial assets. We conclude that instead of a general international risk sharing puzzle, we face an intertemporal smoothing puzzle.

Keywords: international risk sharing, incentive constraints, welfare gains

JEL Classification: F40, G15

Suggested Citation

Eijffinger, Sylvester C. W. and Wagner, Wolf, The Feasible Gains from International Risk Sharing (2003). CESifo Working Paper Series No. 472. Available at SSRN: https://ssrn.com/abstract=271553

Sylvester C. W. Eijffinger

Tilburg University (CentER) - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2411 (Phone)
+31 13 466 3042 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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