International Risk Sharing and the Transmission of Productivity Shocks

This paper shows that standard international business cycle models can be reconciled with the empirical evidence on the lack of consumption risk sharing. First, we show analytically that with incomplete asset markets productivity disturbances can have large uninsurable effects on wealth, depending on the value of the trade elasticity and shock persistence. Second, we investigate these findings quantitatively in a model calibrated to the U.S. economy. With the low trade elasticity estimated via a method of moments procedure, the consumption risk of productivity shocks is magnified by high terms of trade and real exchange rate (RER) volatility. Strong wealth effects in response to shocks raise the demand for domestic goods above supply, crowding out external demand and appreciating the terms of trade and the RER. Building upon the literature on incomplete markets, we then show that similar results are obtained when productivity shocks are nearly permanent, provided the trade elasticity is set equal to the high values consistent with micro-estimates. Under both approaches the model accounts for the low and negative correlation between the RER and relative (domestic to foreign) consumption in the data—the "Backus–Smith puzzle".     

Comparable Axiomatizations of Two Allocation Rules for Cooperative Games with Transferable Utility and Their Subclass of Data Games

The axiom of balanced collective contributions is introduced as a collective variant of the axiom of balanced contributions proposed by Myerson. It requires the identical average impact of the withdrawal of any agent from a game on the remaining population. It turns out that the axiom of balanced collective contributions and the classical axiom of efficiency characterize the equal allocation of nonseparable costs, an allocation rule that is extensively used in cost allocation problems and in accounting. In particular, the equal allocation of nonseparable costs coincides with the nucleolus on the class of data games within the European REACH legislation. While our result does not hold on data games, extra axioms enable provision of comparable characterizations of the equal allocation of nonseparable costs and the Shapley value on this class of games.