We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier … liquid assets. When risk-sharing is primitive, agents selfhedge and hold more liquid assets; this buffers aggregate risks …, resulting in few correlated failures compared to when there is greater risk sharing. We apply this insight to build a model of a …

We analyze efficient risk-sharing arrangements when the value from deviating is determined endogenously by another risk … sharing arrangement. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the … facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the …

facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium effects of … exhibits an optimal aggregate saving rate that is independent of income risk, whereas the optimal time-invariant tax on capital … implementing this saving rate is increasing in income risk. The optimal saving rate is constant along the transition and its sign …