Risk-Sharing with Network Transaction Costs

45 Pages Posted: 25 Sep 2023

See all articles by Christian Cox

Christian Cox

University of Arizona - Department of Economics

Akanksha Negi

Monash University - Department of Econometrics and Business Statistics

Digvijay Negi

Cornell University - Charles H. Dyson School of Applied Economics and Management; Indira Gandhi Institute of Development Research (IGIDR); Indira Gandhi Institute of Development Research

Date Written: September 2, 2023

Abstract

Transaction costs can impede transfers, causing consumption to co-vary with endowment. We extend the standard risk-sharing model to include transaction costs and derive a risk-sharing test that uses consumption, production, and trade network data. We incorporate network-robust inference and demonstrate how information from the bilateral transactions can be aggregated in a sufficient way to control for them in estimation. We illustrate the method using data from the global trade in rice, wheat, and maize. Our results indicate that transaction costs impede risk sharing, particularly in maize and rice. We use the estimated model to perform counterfactual analysis, showing how changing transaction costs affects global risk-sharing and how a complete halt of wheat trade between Ukraine-Russia and major importers changes equilibrium networks.

JEL Classification: D50, D81, D85, F1

Suggested Citation

Cox, Christian and Negi, Akanksha and Negi, Digvijay and Negi, Digvijay, Risk-Sharing with Network Transaction Costs (September 2, 2023). Available at SSRN: https://ssrn.com/abstract=4555847 or http://dx.doi.org/10.2139/ssrn.4555847

Christian Cox (Contact Author)

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

Akanksha Negi

Monash University - Department of Econometrics and Business Statistics ( email )

900 Dandenong Road
Caulfield East, 3145
Australia

Digvijay Negi

Cornell University - Charles H. Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

HOME PAGE: http://www.igidr.ac.in/staff/negi-digvijay/

Indira Gandhi Institute of Development Research ( email )

Film City Road, Goregaon East
Mumbai, 400065
India

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