The channels of consumption risk-sharing in Korea

ABSTRACT

This study investigates intranational risk-sharing behaviour in Korea’s 16 province-level regions over the period 2001–2017. Korea’s degree of intranational risk-sharing is at an almost perfect level. However, the extent of risk-sharing declines in the period following the subprime crisis. We also find that risk-sharing through the factor markets works well for metropolitan cities while the degree of risk-sharing is much higher for provinces through the fiscal channel and the credit markets.

KEYWORDS:

• Consumption Risk-sharing
• intranational
• Korean regions
• fiscal Channel
• credit Markets

JEL CLASSIFICATION:

• C33
• E21
• E60
• H77

Acknowledgments

This work was supported by Incheon National University Research Grant in 2016, for which Sangyeon Hwang is grateful. We thank an editor and a referee for invaluable comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ For this reason, the main result of Song, Kim, and Kim (2010) – that the risk of output volatility is not almost shared–differs greatly from ours and previous findings in other countries.

² The time index is suppressed for convenience.

³ Following Asdrubali, Sørensen, and Yosha (1996), we define NRI = GRDP + net factor income + nonpersonal taxes (i.e. business excise taxes) – retained earnings (including capital consumption). We calculate NRI as the sum of residents’ earnings (compensation of employees and proprietors’ income) and distributed profits (interests and rents), plus local government tax income.

⁴ $NRDI$=$NRI-$ personal income taxes – social security contributions + social security benefits + grants to local governments + transfers to individuals.

⁵ Consumption is the sum of private and government consumptions.

⁶ Following Hepp and Von Hagen (2013), we regard the risk-sharing channel from GRDP to NRI as ‘factor-markets’ channel because both labour markets and capital markets play a role through this channel. As explained in Footnote 3, net factor income included in NRI reflects income adjustments due to both labour mobility and the cross-ownership of productive asset. For example, employees work in a neighbouring region, and contribute to the neighbouring region’s GRDP while generating labour income for their region of residence. The same is true for the income from the cross-ownership of productive assets.

⁷ We perform poolability tests described in Baltagi (2013, 68–76) such as Lagrange Multiplier-based tests for a random effect model and F-tests for a fixed-effect model.

⁸ We perform a Pesaran (2004) test for cross-section dependence, a likelihood ratio test for heteroskedasticity, and a Wooldridge test for autocorrelation.

⁹ Over the period 2001–2017, the average ratio of out-of-region commuters is 10.8% and 5.7% for metropolitan cities and provinces, respectively. For the same period, the average ratio of saving a deposit to GRDP is 73.4% and 35% for metropolitan cities and provinces, respectively. The average ratio of government consumption to GRDP is 14.5% and 19.3% for metropolitan cities and provinces, respectively.

¹⁰ This aspect is also examined by Ho, Ho, and Li (2015). They claim that a higher saving deposit would make households less likely to participate in risk-sharing arrangements, as they have higher financial capacity to smooth consumption variation.

Additional information

Funding

This work was supported by the Incheon National University [2016-1954].