An Alternative Unifying Measure of Welfare Gains from Risk-Sharing
Following Lucas's (1987) standard approach, welfare gains from international risk-sharing have been measured as the percentage increase in consumption levels that leaves individuals indifferent between, autarky and risk-sharing. The author pro...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/09/1614752/alternative-unifying-measure-welfare-gains-risk-sharing http://hdl.handle.net/10986/19552 |
| Summary: | Following Lucas's (1987) standard
approach, welfare gains from international risk-sharing have
been measured as the percentage increase in consumption
levels that leaves individuals indifferent between, autarky
and risk-sharing. The author proposes to measure welfare
gains as the increase in consumption growth, instead of
consumption levels. When the consumption process is
non-stationary, the author's proposed measure has
several attractive features: it does not depend on the
horizon, and it is robust to alternative specifications of
the consumption stochastic processes (from geometric
Brownian processes, to Orstein-Ulhenbeck mean-reverting
processes), and preferences (from constant relative risk
aversion preferences to Kreps-Porteus preferences). The
author then uses this measure to estimate potential welfare
gains from international risk-sharing for a representative
U.S. consumer. The author finds that if international
risk-sharing leads only to a complete elimination of
aggregate consumption volatility (with no impact on
consumption growth), it represents gains to a U.S. consumer
of only $ 12 a year on average. But if international
risk-sharing also permits an increase in consumption growth,
it may have a sizable impact on welfare. Each 0.5 percentage
point increase in consumption growth, represents gains to a
U.S. consumer of about $ 160 a year on average. |
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