Private information and business cycle risk sharing

Alfred Duncan

Working Papers from Business School - Economics, University of Glasgow

Abstract: When individuals have private information about their own luck and in- come, 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. (search for similar items in EconPapers)
JEL-codes: D31 D52 D82 (search for similar items in EconPapers)
Date: 2016-01
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Citations: View citations in EconPapers (1)

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