Aggregate Risk Sharing Across US States and Across European Countries.

Abstract

The paper analyzes risk sharing across US States and across European countries. The empirical literature on this subject has failed to recognize that, as long as agents can borrow and lend, risk sharing should be measured with respect to shocks to the overall level of wealth, and not to current income. The contribution of this paper is to build an appropriate empirical measure of risk sharing focused on shocks to the expected present value of resources. My main ndings are: i) in the US private capital markets allow states to share 40% of shocks to overall domestic wealth; ii) however, risk sharing relative to shocks to the present value of labor income is low (only 5-7%); iii) the amount of risk sharing through the federal system is likely to be less than estimated by Sachs and Sala-i-Martin (20-30% vs 40%); iv) in Europe the extent of risk sharing through private capital markets is almost zero. Since my approach encompasses the approaches of Sachs and Sala-i-Martin and of other contributions in the literature, I am also able to explain the apparent dierences in their results.

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