DIVERSIFICATION OF RISK AND GROWTH

Abstract

This paper provides evidence that domestic opportunities to share risk have contributed to slower growth. We first provide a simple model economy that demonstrates how a country's ability to diversify risk is linked to its growth rate. In the context of the model economy, we then investigate empirically whether there is any systematic relationship between domestic opportunities to diversify risk and growth. We employ two econometric procedures: (1) traditional instrumental variables estimation and (2) dynamic panel methods. Interpreted in the context of the model economy, the empirical analysis reveals a robust negative relationship between domestic opportunities to diversify risk and both capital stock and output growth.