Uninsurance through trade


Trade with di¤erentiated goods normally provides a form of Insurance against disasters, such as .oods and .res, through an increasing relative price of goods from the a­ icted country. With open access renewable resources this is reversed. A country hit by a negative shock recovers faster if trading with fewer countries and, if trading with many, shocks a¤ecting also the trading partners are preferred over idiosyncratic shocks. Trade thus increases economic vulnerability to disasters and local disasters will be worse than global. Furthermore, world markets transmit shocks so a natural disaster in one country can cause man-made disasters in competitor countries. These results are particularly relevant for developing countries due to high renewable resource reliance, more problems of open access and more economic vulnerability to disasters. A calibration suggests these concerns may apply to around 60 percent of world sheries and that around 20 percent risk collapsing following small idiosyncratic shocks.


Published June 20, 2017 9:49 PM - Last modified July 26, 2017 8:27 AM