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Rev Fin 2001; 14:277-305
© 2001 the Society for Financial Studies

Article

Global diversification, growth, and welfare with imperfectly integrated markets for goods

B Dumas1,2,3,z and R Uppal4
1 INSEAD, Finance Department, Boulevard de Constance, 77305 Fontainebleau Cedex, France
2 University of Pennsylvania, Philadelphia, PA, USA
3 NBER; CEPR
4 London Business School, London, UK
z Corresponding author/address
E-mail: bernard.dumas@insead.fr

Abstract

In this article we examine the effect of the imperfect mobility of goods on international risk sharing and, through that, on the investment in risky projects, welfare, and growth. Our main result is that the welfare gain from integration of financial markets is not greatly reduced by the presence of goods market imperfections, modeled as a cost of transferring goods from one country to the other. We also find that the gain is nonmonotonic with respect to investors' risk aversion and the aggregate volatility of output growth. The policy implication to be drawn is that financial market integration is a worthwhile goal to pursue even when full goods mobility has not been achieved.


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