Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 13/2014: Uninsurance through Trade

Johan Gars () and Daniel Spiro ()
Additional contact information
Johan Gars: The Beijer Institute of Ecological Economics,, Postal: The Royal Swedish Academy of Sciences , P.O. Box 50005, , 104 05 Stockholm, , Sweden
Daniel Spiro: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Abstract: Trade with differentiated goods normally provides a form of insurance against disasters, such as floods and fires, through an increasing relative price of goods from the a­fflicted country. With open access renewable resources this is reversed. A country hit by a negative shock recovers faster if trading with fewer countries and, if trading with many, shocks affecting also the trading partners are preferred over idiosyncratic shocks. Trade thus increases economic vulnerability to disasters and local disasters will be worse than global. Furthermore, world markets transmit shocks so a natural disaster in one country can cause man-made disasters in competitor countries. These results are particularly relevant for developing countries due to high renewable resource reliance, more problems of open access and more economic vulnerability to disasters. A calibration suggests these concerns may apply to around 60 percent of world fisheries and that around 20 percent risk collapsing following small idiosyncratic shocks.

Keywords: Open Access; Renewable Resource; Trade; Disaster; Variety

JEL-codes: D62; F18; Q27; Q28

52 pages, March 30, 2014

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