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Testing Efficient Risk Sharing with Heterogeneous Risk Preferences: Semi-parametric Tests with an Application to Village Economies

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Author Info

  • Maurizio Mazzocco

    ()
    (Economics University of Wisconsin-Madison)

  • Shiv Saini
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    Abstract

    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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    File URL: http://repec.org/sed2006/up.14118.1138223003.pdf
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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 108.

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    Date of creation: 03 Dec 2006
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    Handle: RePEc:red:sed006:108

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    Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    Keywords: Risk Sharing; Efficiency; Heterogeneous Risk Preferences;

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    1. Masao Ogaki & Qiang Zhang, 2000. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometric Society World Congress 2000 Contributed Papers 1588, Econometric Society.
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    Cited by:
    1. Hara, Chiaki, 2008. "Complete Monotonicity of the Representative Consumer's Discount Factor," PIE/CIS Discussion Paper 367, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.

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