An Alternative Unifying Measure of Welfare Gains from Risk-Sharing

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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Bibliographic Details
Main Author:	Auffret, Philippe
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	AGGREGATE CONSUMPTION BUSINESS CYCLE CONDITIONAL CONVERGENCE CONSUMER PREFERENCES CONSUMPTION GROWTH CONSUMPTION LEVELS DISCOUNT RATE DISCOUNT RATES ECONOMIC FLUCTUATIONS ECONOMIC POLICY ECONOMIC WELFARE ECONOMICS ECONOMICS LITERATURE ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL RESULTS EMPIRICAL SECTION EMPIRICAL STUDIES EQUILIBRIUM EQUITY MARKETS EXPECTED UTILITY FISCAL POLICY FUTURE RESEARCH GDP GENERAL EQUILIBRIUM MODEL GROWTH RATE INCOME INSURANCE INTEREST RATE INTEREST RATES MARGINAL UTILITY OPTIMIZATION OPTIMIZING BEHAVIOR PER CAPITA CONSUMPTION PER CAPITA CONSUMPTION GROWTH POLICY RESEARCH POPULATION GROWTH PORTFOLIO PORTFOLIOS PUBLIC POLICY RANDOM WALK RISK AVERSION RISK PREMIUM RISK SHARING SECURITIES UNDERVALUATION UTILITY FUNCTION UTILITY FUNCTIONS WEALTH WELFARE GAINS
Online Access:	http://documents.worldbank.org/curated/en/2001/09/1614752/alternative-unifying-measure-welfare-gains-risk-sharing http://hdl.handle.net/10986/19552

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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.