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Testing Efficient Risk Sharing with Heterogeneous Risk Preferences

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  • Maurizio Mazzocco
  • Shiv Saini

Abstract

We propose a method that enables one to test efficient risk sharing even when households have different risk preferences. The method is composed of three tests. The first one determines whether in the data households have homogeneous risk preferences. The second and third tests evaluate efficient risk sharing when the hypothesis of homogeneous risk preferences is rejected. We use this method to test efficient risk sharing in rural India. Using the first test, we strongly reject the hypothesis of identical risk preferences. Using the second and third tests, we reject efficiency at the village but not at the caste level. (JEL D12, D86, G22, O12, O18, R23, Z13)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.1.428
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 1 (February)
Pages: 428-68

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:1:p:428-68

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  1. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  2. Fan, Yanqin & Li, Qi, 1996. "Consistent Model Specification Tests: Omitted Variables and Semiparametric Functional Forms," Econometrica, Econometric Society, vol. 64(4), pages 865-90, July.
  3. Joseph P. Romano & Michael Wolf, 2003. "Stepwise multiple testing as formalized data snooping," Economics Working Papers 712, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-94, March.
  5. Orazio Attanasio & Steven J. Davis, 1994. "Relative Wage Movements and the Distribution of Consumption," NBER Working Papers 4771, National Bureau of Economic Research, Inc.
  6. Chiaki Hara & James Huang & Christoph Kuzmics, 2006. "Efficient Risk-Sharing Rules with Heterogeneous Risk Attitudes and Background Risks," KIER Working Papers 621, Kyoto University, Institute of Economic Research.
  7. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 595-609, October.
  8. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-91, May.
  9. Masao Ogaki & Qiang Zhang, 2000. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometric Society World Congress 2000 Contributed Papers 1588, Econometric Society.
  10. Lucas, Deborah J., 1994. "Asset pricing with undiversifiable income risk and short sales constraints: Deepening the equity premium puzzle," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 325-341, December.
  11. Aiyagari, S. Rao & Gertler, Mark, 1991. "Asset returns with transactions costs and uninsured individual risk," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 311-331, June.
  12. Martin Ravallion & Shubham Chaudhuri, 1997. "Risk and Insurance in Village India: Comment," Econometrica, Econometric Society, vol. 65(1), pages 171-184, January.
  13. Ligon, Ethan, 1998. "Risk Sharing and Information in Village Economics," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 847-64, October.
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