Optimal Risk Sharing Under Limited Commitment: Evidence From Rural Vietnam
AbstractWe use panel data from a household survey conducted in Vietnam to analyze the effectiveness of informal risk sharing arrangements in protecting household consumption from idiosyncratic income shocks. We focus on the effects of reported harvest shocks and of estimated shocks to agricultural revenues on adult equivalent consumption. The full-insurance allocation is tested against a specified alternative under which contracts are not fully enforceable ex-post. We find that farmers hit by unfavorable events stabilize their consumption level below the village aggregate level, irrespective of the level of realized shocks. At the same time, farmers experiencing more favorable shocks enjoy higher consumption in proportion to the realized value of idiosyncratic shocks. Together, these finding are consistent with a simple 2-period model of optimal risk sharing with one-sided limited commitment. These results hold for total consumption and for non-durable consumption. We also find however some evidence supporting the full insurance hypothesis for food consumption.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 12688.
Date of creation: Sep 2008
Date of revision:
Consumption; Risk-sharing; Informal Insurance; Vietnam;
Other versions of this item:
- Patrick Eozenou, 2009. "Optimal Risk Sharing Under Limited Commitment: Evidence From Rural Vietnam," Working Papers 06, Development and Policies Research Center (DEPOCEN), Vietnam.
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-AGR-2009-01-17 (Agricultural Economics)
- NEP-ALL-2009-01-17 (All new papers)
- NEP-DEV-2009-01-17 (Development)
- NEP-IAS-2009-01-17 (Insurance Economics)
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