International risk sharing, learning by doing, and growth

This paper explores the influence of international risk sharing on aggregate growth for a country that trades with the rest of the world. Learning by doing supports long-run growth as it generates sector-specific increases in productivity proportional to labor’s allocation across sectors. The paper shows that trade permits specialization in production which raises the growth rate of aggregate output. Uncertainty in productivity, however, discourages growth since greater diversification in production reduces aggregate risk. Consequently, international risk sharing raises growth during transition to the balanced growth equilibrium, although it leaves long-run growth unchanged. The model also helps to explain related empirical observations. q 1999 Elsevier Science B.V. All rights reserved. JEL classification: F4; F3; D9; D8