Growth and risk-sharing with private information

We examine the impact of incomplete risk-sharing on growth and welfare. The source of market incompleteness in our economy is private information: a household's idiosyncratic productivity shock is not observable by others. Risk-sharing between households occurs through long-term contracts with intermediaries. We find that incomplete risk-sharing tends to reduce the rate of growth relative to the complete risk-sharing benchmark. Numerical examples indicate that the welfare cost and the growth effect of private information are small. (C) 2001 Elsevier Science B.V. All rights reserved.