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Empirical Economics

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18-01-2023

Risk-sharing within Brazil and South America

Authors: Eduardo Silva, Alex Ferreira

Published in: Empirical Economics | Issue 2/2023

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Abstract

Our findings suggest that risk-sharing is 24.6% higher within Brazilian federal states than between a sample of South American countries. This “border effect” occurs irrespective of the geographical distance between regions which, in turn, decreases risk-sharing (by 2.3% per thousand kilometers). We report that the variance of state disposable income is between 73.1 and 78.5% lower than the variance of gross state product in Brazil. Our results show that fiscal federalism promotes risk-sharing by reducing the volatility of disposable income. The tax-transfers system is progressive as income persistently flows from rich to poorer Brazilian states. We conclude that the benefits from increasing international integration within South America will be higher than in the intranational case.

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More recently, Oliveira and Carrasco-Gutierrez (2016) find that a fraction between 48 and 54% of consumers follow a rule of thumb in Brazil.

Deviations from the law of one price are less prevalent within country borders (Rogoff 1996 and Engel and Rogers 1996).

This finding is not far from other results. Cont et al. (2017) show that the federal government is responsible for reducing 10% of income volatility in Argentina. Feld et al. (2020) find that the fiscal system reduces the effects of idiosyncratic shocks by 10% in Switzerland. Andersson (2008) finds coefficients ranging from 18% and 27% in Sweden, depending on the region. Petraglia et al. (2018) find coefficients that range from 4 to 15% in Italy, depending on the method and the subsample of the data used.

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Fafchamps and Gubert (2007) finds evidence, in a household-level study for the Philippines, that geographical proximity is a major determinant of risk-sharing networks.

As mentioned, non-optimizer agents could be related to Campbell and Mankiw’s 1989 “rule of thumb” consumers, as they may face market frictions or subsistence restrictions, for example, and consume out of their current income only.

The databases and R scripts for this paper tests and estimations are available with the authors upon request.

We have also performed Wu–Hausman tests in order to check for the consistency of the IV estimator. The results of these tests suggest that the OLS estimator is preferable to the IV one for both the regional and international levels.

Those values refer to the disaggregated effects, given by \(\beta _{TR} \frac{TR_{j}}{Y_{j}}\) (Transfers) and \(-\beta _{TX} \frac{TX_{j}}{Y_{j}}\) (Taxes)

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Title: Risk-sharing within Brazil and South America
Authors: Eduardo Silva
Alex Ferreira
Publication date: 18-01-2023
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 2/2023
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-022-02350-1

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