Assessing International Risk Sharing in Developing Countries

ABSTRACT Using an analytical decomposition to quantify the risk shared through varies channels of smoothing, this paper analyses the impact of financial integration on risk sharing in developing economies between 1994 and 2019. We establish that the omission of workers' remittances—now the largest source of financial flows to these economies—is an important factor in the limited evidence for risk sharing found previously. Of the output shocks that are smoothed, we estimate the remittance channel accounts for about 20%. We examine whether more financially developed countries—who can intermediate remittance inflows more efficiently—accrue greater benefits from sharing risk. Exploiting significant variation in the access, usage, and depth of the domestic financial sector, we show that greater financial access is associated with greater risk sharing benefits, but greater financial depth is associated with reduced risk sharing. Our results are consistent with models where risk sharing arrangements are subject to frictions in the allocation of loanable funds due in part to segmented access to local credit markets.