Risk Sharing and Industrial Specialization: Regional and International Evidence

Abstract

We provide empirical evidence that risk sharing enhances specialization in production. First, we calculate an index of specialization for each of the European Community (EC) and non-EC OECD countries, U.S. states, Canadian provinces, Japanese prefectures, Latin American countries, and regions of Italy, Spain, and the United Kingdom. Then, we estimate the degree of capital market integration (risk sharing) within each of these groups of regions. Finally, we perform a regression of the specialization index on the degree of risk sharing, controlling for relevant economic variables and find a positive relation between the degree of specialization and the amount of risk sharing within a group. Instrumental variables regressions confirm that risk sharing is a causal determinant of specialization.

Keywords: Financial Integration, Regional Specialization, International Specialization, Finance and Macroeconomics

JEL Classification: F15, F2, F36, F43