Risk Sharing With Limited Commitment And Preference Heterogeneity: Structural Estimation And Testing
In order to analyze the role of limited commitment and preference heterogeneity in explaining the consumption allocation, I propose a theoretical and empirical framework to estimate and evaluate a risk-sharing model where insurance transfers have to be self-enforcing and the coefficient of relative risk aversion may depend on observable household characteristics. I compare this model to benchmark models with full commitment and/or without preference heterogeneity using data from three Indian villages. I find that the limited commitment model with heterogeneous preferences outperforms the benchmark models in a statistical sense and in terms of (i) explaining the dynamic response of consumption to idiosyncratic income shocks, (ii) accounting for the variation of consumption unexplained by household and time effects, and (iii) capturing the variation of inequality across time and villages and predicting changes in inequality. I also use the estimated models to predict the effects of a counterfactual tax and transfer policy on the consumption allocation. The limited commitment model with preference heterogeneity predicts larger benefits to the poor than its homogeneous counterpart. (JEL: C52, D10, D52)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 13 (2015)
Issue (Month): 2 (04)
|Contact details of provider:|| Web page: http://www.eeassoc.org/|
More information through EDIRC