International risk sharing and government moral hazard

Research output: Contribution to journalArticleAcademicpeer-review

3 Citations (Scopus)


This paper analyzes incentive problems caused by international risk sharing. They arise because international risk sharing contributes to the insurance of domestic consumption and thus lowers governments’ incentives to increase output. We show that the resulting distortions can lead to substantial efficiency losses. Complete risk sharing is, therefore, undesirable and the optimal degree of risk sharing may be low. Furthermore, we show that households’ risk sharing decisions are socially inefficient and are effectively maximizing government moral hazard. As a result, financial innovation and integration may reduce welfare by increasing households’ risk sharing opportunities.
Original languageEnglish
Pages (from-to)577-598
Number of pages22
JournalOpen Economies Review
Issue number5
Publication statusPublished - 2007
Externally publishedYes


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