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Do lack of transparency and enforcement undermine international risk-sharing? (English) Zbl 1233.91188

Summary: This paper studies the extent to which poor institutions compromise risk-sharing. We model a multilateral organization as a social contract that provides insurance to members. Countries privately observe the realization of a performance variable with a verification cost that differs across countries, reflecting the “transparency” of institutions. When the level of transparency is exogenous, the optimal contract provides complete expected risk sharing across countries and states. Poor transparency and enforcement reduce consumption and result in insurance rationing. When a country can increase transparency endogenously, this generates an externality and moral hazard. We first characterize the outcome when the multilateral agency can influence members’ institutions by choosing the countries’ level of effort. Next we derive a tax/subsidy scheme that can induce countries to choose the socially optimal level.

MSC:

91B64 Macroeconomic theory (monetary models, models of taxation)
91B40 Labor market, contracts (MSC2010)
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