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Optimal Risk Sharing Under Limited Commitment: Evidence From Rural Vietnam

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Eozenou, Patrick

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Abstract

We 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12688.

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Date of creation: Sep 2008
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Handle: RePEc:pra:mprapa:12688

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Related research
Keywords: Consumption; Risk-sharing; Informal Insurance; Vietnam;

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Find related papers by JEL classification:
O1 - Economic Development, Technological Change, and Growth - - Economic Development
I3 - Health, Education, and Welfare - - Welfare and Poverty
D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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  1. Coate, Stephen & Ravallion, Martin, 1993. "Reciprocity without commitment : Characterization and performance of informal insurance arrangements," Journal of Development Economics, Elsevier, vol. 40(1), pages 1-24, February. [Downloadable!] (restricted)
  2. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
  3. White, Howard & Masset, Edoardo, 2002. "Child poverty in Vietnam: using adult equivalence scales to estimate income-poverty for different age groups," MPRA Paper 777, University Library of Munich, Germany. [Downloadable!]
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  4. Stefan Dercon & Pramila Krishnan, 2003. "Risk Sharing and Public Transfers," Economic Journal, Royal Economic Society, vol. 113(486), pages C86-C94, March. [Downloadable!] (restricted)
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  5. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February. [Downloadable!] (restricted)
  6. Attanasio, Orazio & Rios-Rull, Jose-Victor, 2000. "Consumption smoothing in island economies: Can public insurance reduce welfare?," European Economic Review, Elsevier, vol. 44(7), pages 1225-1258, June. [Downloadable!] (restricted)
  7. Martin Ravallion & Shubham Chaudhuri, 1997. "Risk and Insurance in Village India: Comment," Econometrica, Econometric Society, vol. 65(1), pages 171-184, January.
  8. Ligon, Ethan & Thomas, Jonathan P & Worrall, Tim, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 209-44, January.
  9. Morduch, Jonathan, 2002. "Consumption Smoothing Across Space: Testing Theories of Risk-Sharing in the ICRISAT Study Region of South India," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  10. 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. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
  12. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-91, May. [Downloadable!] (restricted)
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