INTERNATIONAL RISK SHARING AND ECONOMIC-GROWTH

International risk sharing which diversifies away income risk will reduce saving, with constant relative risk aversion. If growth arises from the external effects of human capital accumulation then reducing saving will reduce growth. Welfare also may fall with risk sharing, because endogenous growth with external effects of capital accumulation typically implies a competitive equilibrium growth rate already less than the optimal growth mte. We demonstrate these results in a standard, representative-agent economy. Diversifying away mte-of-return risk also will reduce saving and growth rates if relative risk aversion exceeds one, but this diversification always increases welfare.