Previous tests of efficient risk sharing have assumed that households have identical risk preferences. This assumption is equivalent to the restriction that households can pool their resources, but cannot optimally allocate them according to individual risk preferences. In this paper, we first test the hypothesis of homogeneous risk preferences and reject it. This result implies that previous tests should have rejected efficiency even if households are perfectly sharing risk. We then derive two tests of efficient risk sharing that allow for heterogeneity in risk preferences. Using the two tests we cannot reject efficient risk sharing
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
108.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:108
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