Risk-sharing with network transaction costs

Transaction costs can impede transfers, causing consumption to co-vary with endowment. We set up a risk-sharing model that incorporates bilateral transaction costs and demonstrate both theoretically and empirically that these costs impede global risk-sharing. Using data on production, consumption, and trade networks for staple food commodities, we highlight the practical implications of our model. Our findings reveal that transaction costs can constrain risk-sharing in global food markets. Using counterfactual analysis, we also show how changes in transaction costs impact global risk-sharing and examine the consequences of a complete disruption of wheat trade between Ukraine, Russia, and major importers.