Risk Insurance in a Transition Economy: Evidence from Rural Romania
AbstractWe 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 InfoPaper provided by Banque de France in its series Working papers with number 154.
Length: 24 pages
Date of creation: 2006
Date of revision:
Risk ; Insurance ; Consumption smoothing ; Transition economies.;
Find related papers by JEL classification:
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
- O5 - Economic Development, Technological Change, and Growth - - Economywide Country Studies
- P2 - Economic Systems - - Socialist Systems and Transition Economies
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