How do countries smooth regional disturbances?

Use of a simple framework to study how idiosyncratic production shocks are smoothed through risksharing across Spanish provinces. By analyzing how production in the average province is successively smoothed until it is used as consumption, it is found that half of the shocks have been smoothed in the period 1973-1993 and that this proportion is even higher in the last decade (1983-1993). Capital and credit market risksharing account for most of this result. Labor mechanisms play a negligable role and the smoothing due to the government tax-transfer system is quite small. Finally, it is observed that the use of provincial prices instead of aggregate prices results in a reduction of the degree of smoothing in the economy.