Risk-Sharing with Network Transaction Costs

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 show both theoretically and empirically that transactions costs can impede global risk-sharing. We illustrate the empirically relevant aspects of our model with production, consumption and trade network data for global trade in staple food commodities. We incorporate networkrobust inference and demonstrate how information from the bilateral transactions can be aggregated in a sufficient way to control for them in estimation. Our results indicate that transaction costs impede risk sharing in food commodities, 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.

Keywords: JEL codes: D50, D81, D85, F1

JEL Classification: D50, D81, D85, F1