Risk Sharing and Industrial Specialization: Regional and International Evidence

Sebnem Kalemli-Ozcan, Bent Sorensen, Oved Yosha , American Economic Review 93(3) , 903-918 , June 2003.

We investigate the empirical relation between risk sharing and specialization in production. We find that there is more risk sharing among regions within countries than among countries and that regions within countries are more specialized than countries as a whole. We regress the specialization index on the degree of risk sharing, controlling for relevant economic variables, and find a positive and statistically significant relation. Instrumental variables regressions suggest that risk sharing may be a determinant of specialization in line with theoretical work on trade and growth under uncertainty.

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