Risk Sharing and the Industrial Revolution: A Macroeconomic Approach

This paper analyzes the role of equilibrium, risk-sharing institutions in leading to the structural transformation in the production technology that brought about the industrial revolution. Guided by history, the model considers two risk-sharing institutions each of complements an existing social structure. The …rst is a ‘Chinese’ style, lineage-based institution: members choose technology based on capital-weighted majority rule and share the output. The second is a ‘British’ style, institution complementing its individualistic social structure: a state-based wealth redistribution institution. Under the lineage-based institution risk-sharing within lineages fosters the adoption of high-risk, high-return technology. Yet, it reduces this adoption by giving the elders, who are capital-rich but more risk-averse, more say in technology choice. The paper examines analytically the factors in‡uencing which structure better promotes adoption of high-risk, high return technology that fosters industrialization. This highlights the possible importance of state-based insurance – the British Poor Law of 1601 –in tilting the balance in favor of the English system and hastening the Industrial Revolution in Britain. Simulation reinforces the relevance of our results. Stanford University. The paper bene…tted from comments by Pete Klenow and participants in the SSHW at Stanford and Universidad Torcuato di Tella.