Heterogeneity and Risk-Sharing in Village Economies

Publication Article File: 

hetergen_and_risk_sharing.pdf

We show how to use panel data on household consumption to directly estimate households' risk preferences. Specifically, we measure heterogeneity in risk aversion among households in Thai villages using a full risk-sharing model, which we then test allowing for this heterogeneity. There is substantial, statistically significant heterogeneity in estimated risk preferences. Full insurance cannot be rejected. As the risk sharing, as-if-complete-markets theory might predict, estimated risk preferences are unrelated to wealth or other characteristics. The heterogeneity matters for policy: Although the average household would benefit from eliminating village-level risk, less-risk-averse households who are paid to absorb that risk would be worse o_ by several percent of household consumption.

Read More: "The Rich Complexity of Village Life," by the Federal Reserve, discusses the findings and implications of this paper.