American Economic Review Vol. 91 No. 4 2001

World Income Components: Measuring and Exploiting Risk-Sharing Opportunities

Stefano G. Athanasoulis¹; Robert J. Shiller²

¹ Department of Finance and Business Economics, Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556. · ² Cowles Foundation, Yale University, P.O. Box 208281, New Haven, CT 06520.

Abstract

A method is constructed for decomposing the variance of changes in incomes in the world into components, to indicate the most important risk-sharing opportunities among people of the world. A constant absolute risk premium (CARP) model, an intertemporal general-equilibrium model of the world, is presented to permit optimal contract design. For a contract designer maximizing a social welfare function, the optimal contracts maximize the equilibrium world real interest rate. Securities are defined in terms of eigenvectors of a transformed variance matrix. The method is applied using Penn World Table data on the G-7 countries, 1950–1992.

DOI

10.1257/aer.91.4.1031

Volume

91

Issue

4

Pages

1031-1054

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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