Private Information and Business Cycle Risk Sharing

31 Pages Posted: 13 Aug 2016

See all articles by Alfred Duncan

Alfred Duncan

University of Kent - School of Economics

Date Written: January 12, 2016

Abstract

When individuals have private information about their own luck and income, the sharing of idiosyncratic risks is hampered by moral hazard. This friction also affects the optimal sharing of business cycle risks. Optimal allocations restrict the exposure of low wealth agents’ consumption to business cycle risk. This encourages truth-telling by high wealth agents who have a high tolerance for business cycle risk, thereby increasing the extent to which idiosyncratic risks can be shared. Implementation of these optimal allocations requires restrictions in the trade of securities contingent on business cycle outcomes.

Keywords: Incomplete markets, business cycles, distribution.

JEL Classification: D31, D52, D82.

Suggested Citation

Duncan, Alfred, Private Information and Business Cycle Risk Sharing (January 12, 2016). Available at SSRN: https://ssrn.com/abstract=2821754 or http://dx.doi.org/10.2139/ssrn.2821754

Alfred Duncan (Contact Author)

University of Kent - School of Economics ( email )

CT2 7NP
United Kingdom

HOME PAGE: http://https://www.kent.ac.uk/economics/staff/profiles/alfred-duncan.html

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