Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies
Abstract
Recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income, thus rejecting the hypothesis of full risk-pooling. We attempt to explain these observations by adding limited commitment as an impediment to risk-pooling. We provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment, and test the model using data from three Indian villages. We find that the model can fully explain the dynamic response of consumption to income, but that it fails to explain the distribution of consumption across households. Copyright 2002 by The Review of Economic Studies LimitedDownload Info
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Article provided by Wiley Blackwell in its journal Review of Economic Studies.
Volume (Year): 69 (2002)
Issue (Month): 1 (January)
Pages: 209-44
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Related research
Keywords:Other versions of this item:
- Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
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