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Heterogeneity and risk sharing in village economies

  • Pierre‐André Chiappori
  • Krislert Samphantharak
  • Sam Schulhofer‐Wohl
  • Robert M. Townsend

We show how to use panel data on household consumption to directly estimate households' risk preferences. Specifically, we measure heterogeneity in risk aversion among households in Thai villages using a full risk‐sharing model, which we then test allowing for this heterogeneity. There is substantial, statistically significant heterogeneity in estimated risk preferences. Full insurance cannot be rejected. As the risk‐sharing as‐if‐complete‐markets theory might predict, estimated risk preferences are unrelated to wealth or other characteristics. The heterogeneity matters for policy: Although the average household would benefit from eliminating village‐level risk, less‐risk‐averse households that are paid to absorb that risk would be worse off by several percent of household consumption.

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File URL: http://hdl.handle.net/10.1111/quan.2014.5.issue-1.x
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Article provided by Econometric Society in its journal Quantitative Economics.

Volume (Year): 5 (2014)
Issue (Month): (03)
Pages: 1-27

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Handle: RePEc:wly:quante:v:5:y:2014:i::p:1-27
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  16. Udry, Christopher, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 495-526, July.
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