We develop a new argument why more precise public information can be beneficial for risk sharing. In contrast to conventional wisdom (Hirshleifer1971, Schlee2001), we show that the release of better public information on the insurable risk can be welfare improving. In our model, agents receive a public and a private signal on their future idiosyncratic income and engage in dynamic risk-sharing arrangements consistent with their rational participation incentives. Income in the current period is publicly observable. With more precise public signals, high-income agents with a low signal are more willing while agents with a high signal are less willing to share today their good fortune with poorer agents. If private information is sufficiently precise, the positive effect dominates the negative effect of better public signals, facilitating higher transfers from high-to-low income agents in self-enforceable arrangements which increases social welfare. The positive effect of information is quantitative important in international risk sharing and supports IMF’s transparent disclosure policy on country risks. Field: macro.
PhD Lunch Seminars Amsterdam
- Speaker(s)
- Piotr Dendeski (VU University Amsterdam)
- Date
- Tuesday, 15 April 2014
- Location
- Amsterdam