Abstract
In this paper, we revisit the conventional view on efficient risk sharing that advance information on future shocks is detrimental to welfare. In our model, risk-averse agents receive private and public signals on future income realizations and engage in insurance contracts with limited enforceability. Consistent with the conventional view, better private and public signals are detrimental to welfare when only one type of signal is informative. Our main novel result applies when both signals are informative. In this case, we show that better public information can improve the allocation of risk when private signals are sufficiently precise. More precise public signals spread out the outside option values of high-income agents with high and low public signals and their willingness to transfer resources to low-income agents decreases. With informative private signals, however, more informative public signals increase outside option values of agents with a high signal by less than outside options of agents with a low signal decrease, facilitating more transfers. The latter effect dominates the former when private signals are sufficiently precise.
Highlights
Should benevolent governments strive to provide better forecasts on real GDP to improve households’ consumption smoothing against country-specific shocks? The theoretical literature (Hirshleifer, 1971, Schlee, 2001) offers sharp predictions for welfare effects of issuing such public forecasts
When we evaluate the quantitative importance of better public information in international risk sharing, we calibrate the model to match risk sharing degrees and public information precision estimated from the data
As the main result in the previous section, we find that the positive effect of public information as summarized in Theorem 1 prevails when allocations depend on the history of public shocks or allocations that are contingent on truthfully reported private signal realizations
Summary
Should benevolent governments strive to provide better forecasts on real GDP to improve households’ consumption smoothing against country-specific shocks? The theoretical literature (Hirshleifer, 1971, Schlee, 2001) offers sharp predictions for welfare effects of issuing such public forecasts. We evaluate the importance of the insurance-information mechanism in the international risk-sharing environment For this application, agents in our model are representative households or governments of small countries that seek insurance against country-specific shocks to real GDP. We find that private information is sufficiently precise in the sense of our main theoretical result for all country groups and better public data quality improves risk sharing. The improvements in risk sharing resulting from changes in disclosure policies of countries towards transparency are ten times more important than the improvements achieved by better IMF forecasts In both scenarios better data quality in a particular group of countries can trigger positive spillover effects to risk sharing and welfare in other countries.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
