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Risk Insurance in a Transition Economy: Evidence from Rural Romania

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  • Irac, D.
  • Minoiu, C.

Abstract

We test the hypothesis of Pareto optimal risk-sharing in a transition economy using a new dataset on a representative sample of 364 rural households from Romania. We identify income shocks as instances of adverse weather, crop and animal diseases, as well as illness and unemployment spells. Despite limited participation of Romanian rural households in formal insurance and credit markets, we fail to reject the hypothesis of full insurance of total non-durable consumption and its components. Survey responses indicate that the main channels of consumption smoothing are self-insurance (for adverse weather, crop and animal diseases), public transfers (for unemployment spells), and to a lesser extent, family ties. We find that adverse weather is associated with higher growth rates of non-food expenditures. Furthermore, richer households are better able to cope with crop failure than poorer households. An alternative explanation to our not rejecting the hypothesis of full insurance is that some shocks to consumption (e.g., illness) play the role of preference shifters of the utility function.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 154.

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Length: 24 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bfr:banfra:154

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Related research

Keywords: Risk ; Insurance ; Consumption smoothing ; Transition economies.;

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References

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  1. Marcel Fafchamps & Susan Lund, 2000. "Risk-Sharing Networks in Rural Philippines," Economics Series Working Papers 10, University of Oxford, Department of Economics.
  2. Emmanuel Skoufias, 2003. "Consumption smoothing in Russia," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(1), pages 67-91, March.
  3. Pierre Dubois, 2000. "Consumption Insurance with Heterogeneous Preferences. Can Sharecropping Help Complete Markets?," Econometric Society World Congress 2000 Contributed Papers 1597, Econometric Society.
  4. 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.
  5. Sahn, David E & Younger, Stephen D & Simler, Kenneth R, 2000. "Dominance Testing of Transfers in Romania," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 46(3), pages 309-27, September.
  6. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
  7. Masao Ogaki & Qiang Zhang, 2000. "Risk Sharing in Village India: the Rule of Decreasing Relative Risk Aversion," Working Papers 00-02, Ohio State University, Department of Economics.
  8. Alessandra Guariglia & Byung-Yeon Kim, 2004. "Earnings uncertainty, precautionary saving, and moonlighting in Russia," Journal of Population Economics, Springer, vol. 17(2), pages 289-310, 06.
  9. Martin Ravallion & Shubham Chaudhuri, 1997. "Risk and Insurance in Village India: Comment," Econometrica, Econometric Society, vol. 65(1), pages 171-184, January.
  10. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-114, Summer.
  11. Deaton, A., 1992. "Saving and Income Smoothing in Cote d'Ivoire," Papers 156, Princeton, Woodrow Wilson School - Development Studies.
  12. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
  13. Robert M. Townsend, 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 83-102, Summer.
  14. Steven Stillman, 2001. "The Response of Consumption in Russian Households to Economic Shocks," William Davidson Institute Working Papers Series 412, William Davidson Institute at the University of Michigan.
  15. Jacoby, Hanan G & Skoufias, Emmanuel, 1997. "Risk, Financial Markets, and Human Capital in a Developing Country," Review of Economic Studies, Wiley Blackwell, vol. 64(3), pages 311-35, July.
  16. Paxson, C.H., 1991. "Consumption And Income Seasonality In Thailand," Papers 150, Princeton, Woodrow Wilson School - Development Studies.
  17. Chaves, R.A. & Sanchez, S. & Schor, S. & Tesliuc, E., 2001. "Financial Markets, Credit Constraints, and Investment in Rural Romania," Papers 499, World Bank - Technical Papers.
  18. Grimard, Franque, 1997. "Household consumption smoothing through ethnic ties: evidence from Cote d'Ivoire," Journal of Development Economics, Elsevier, vol. 53(2), pages 391-422, August.
  19. Kaivan Munshi & Mark Rosenzweig, 2005. "Economic development and the decline of rural and urban community-based networks," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(3), pages 427-443, 07.
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Cited by:
  1. Rodríguez-Planas, Núria & Benus, Jacob, 2006. "Evaluating Active Labor Market Programs in Romania," IZA Discussion Papers 2464, Institute for the Study of Labor (IZA).

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