Risk-Sharing Externalities

• Published in: The Journal of political economy Vol. 131; no. 3; pp. 595 - 632
• Main Authors: Bocola, Luigi, Lorenzoni, Guido
• Format: Journal Article
• Language: English
• Published: Chicago The University of Chicago Press 01.03.2023; University of Chicago, acting through its Press
• Subjects: Consumers; Economic crisis; Entrepreneurs; Financial institutions; High risk; Insurance; Political economy

Financial crises typically occur because firms and financial institutions are highly exposed to aggregate shocks. We propose a theory to explain these exposures. We study a model where entrepreneurs can issue state-contingent claims to consumers. Even though entrepreneurs can use these instruments t...