INTERNATIONAL RISK SHARING AND ECONOMIC-GROWTH

International risk sharing which diversifies away income risk will red uce saving, with constant relative risk aversion. If growth arises fro m the external effects of human capital accumulation then reducing sav ing will reduce growth. Welfare also may fall with risk sharing, becau se endogenous growth with external effects of capital accumulation typ ically implies a competitive equilibrium growth rate already less than the optimal growth mte. We demonstrate these results in a standard, r epresentative-agent economy. Diversifying away mte-of-return risk also will reduce saving and growth rates if relative risk aversion exceeds one, but this diversification always increases welfare.