Risk Sharing of Disaggregate Macroeconomic and Idiosyncratic Shocks

Abstract

We estimate the extent to which idiosyncratic and disaggregate macro shocks (such as regional and industry shocks) are not shared in the economy. Comparing the degree to which idiosyncratic and disaggregate macro shocks are not shared grants a deeper understanding as to the reason why the economy lacks in speci¯c areas of risk sharing arrangements. As well, it can point to areaswhere the economy’s risk sharing capability can be enhanced. Using household data from the Panel Study of Income Dynamics, we ¯nd that a negligible amount of risk (around 10%) is shared in the aggregate, about 50% is shared within regions and industries, while the remaining 40% is not shared with other households. These ¯ndings suggest that given the low level of intranational risk sharing, increased international integration may not lead to a signi¯cant increase in international risk sharing.