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Assessing the Impact of Public Transfers on Private Risk Sharing Arrangements. Evidence from a Randomized Experiment in Mexico

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Author Info
Marina Pavan (Geary Institute, University College Dublin)
Aldo Colussi (University of Western Ontario, USA)

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Abstract

We adopt a structural approach to studying the effects of public transfers on consumption smoothing, risk sharing and welfare in small village economies. We calibrate the key parameters of a dynamic limited commitment model using data gathered as part of the Mexican Progresa program, and take advantage of the randomized experimental design of the data to validate the model using the treatment sample. The limited commitment model enriched to allow for unobserved heterogeneity in preferences can reasonably well explain consumption dynamics and cross-sectional distributions. The calibrated model correctly predicts the increase in consumption smoothing of transfers’ recipients, and the decrease in risk sharing between beneficiaries and non beneficiaries of the program. Progresa transfers are found to crowd-out between 3% and 10% of the pre-existing private transfers, but the overall direct effect of the subsidy on consumption is welfare improving for all households. Last, we use our structural model to evaluate a counterfactual, fully funded, insurance scheme.

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File URL: http://geary.ucd.ie/images/Publications/WorkingPapers/gearywp200807.pdf
File Format: application/pdf
File Function: First version, 2008
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Publisher Info
Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 200807.

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Length: 32 pages
Date of creation: 27 Feb 2008
Date of revision:
Handle: RePEc:ucd:wpaper:200807

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Related research
Keywords: Risk Sharing; Limited Commitment; Crowding-out; Transfers Programsd;

Find related papers by JEL classification:
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
I38 - Health, Education, and Welfare - - Welfare and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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