Inferring informal risk-sharing regimes: Evidence from rural Tanzania

This paper studies informal risk-sharing regimes in a unified framework by examining households’ intertemporal consumption behavior. We exploit a theoretically-consistent link between interest rates and cross-sectional consumption moments to test alternative risk-sharing models without requiring data on interest rates or assuming a restriction to eliminate the need for such data, which are often unavailable in developing economies. We specify tests that allow us to distinguish among models even with temporal dependence in income shocks. Using data from rural Tanzania we find that the consumption pattern is consistent with the self-insurance regime, and that risk aversion varies substantially across districts. Imposing a strict condition on interest rates, as often done in prior literature, misses their intertemporal heterogeneity and biases the estimation of risk aversion.