EconPapers    
Economics at your fingertips  
 

Risk Sharing Externalities

Luigi Bocola and Guido Lorenzoni

No 26985, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Financial crises typically arise because firms and financial institutions choose balance sheets that expose them to aggregate risk. We propose a theory to explain these risk exposures. We study a financial accelerator model where entrepreneurs can issue state-contingent claims to consumers. Even though entrepreneurs could use these contingent claims to hedge negative shocks, we show that they tend not to do so. This is because it is costly to buy insurance against these shocks as consumers are also harmed by them. This effect is self-reinforcing, as the fact that entrepreneurs are unhedged amplifies the negative effects of shocks on consumers’ incomes. We show that this feedback can be quantitatively important and lead to inefficiently high risk exposure for entrepreneurs.

JEL-codes: E44 G01 G11 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-ent, nep-mac and nep-rmg
Note: AP CF EFG ME
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Published as Luigi Bocola & Guido Lorenzoni, 2023. "Risk-Sharing Externalities," Journal of Political Economy, vol 131(3), pages 595-632.

Downloads: (external link)
http://www.nber.org/papers/w26985.pdf (application/pdf)

Related works:
Journal Article: Risk-Sharing Externalities (2023) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:26985

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w26985

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by (wpc@nber.org).

 
Page updated 2024-12-28
Handle: RePEc:nbr:nberwo:26985