IDEAS home Printed from https://ideas.repec.org/p/cdl/agrebk/qt2zr503fq.html
   My bibliography  Save this paper

Risk sharing tests and covariate shocks

Author

Listed:
  • Ligon, Ethan

Abstract

The hallmark of full risk sharing is that agents' marginal utilities of expenditure (MUEs) have a simple factor structure; a Pareto weight is divided by an aggregate price. Take logarithms and full risk-sharing can be easily tested using panel data with two-way fixed effects. The catch is that we don't directly observe MUEs, and must infer these using data on consumption expenditures. The standard approach to this inference problem is to assume some form of homothetic utility, in which case the MUE is a function of total expenditures and a single price index, and all demands have unit price elasticities. This approach works well when the shocks being tested affect agents' budgets without changing prices; i.e., when the shocks are idiosyncratic. But "covariate" shocks may change relative prices, in which case the standard risk-sharing tests which assume that no demands are inelastic will deliver apparently perverse results. What is the class of utility structures that allow one to test risk-sharing using only panel data on expenditures and two-way fixed effects, and does this class included non-homothetic preferences which are consistent with more realistic demand responses to changes in relative prices? We obtain this class, which happens to be semi-parametric and nests the usual homothetic specification, but which allows for highly flexible Engel curves, with $n$ parameters corresponding to the income elasticities of $n$ goods. We provide a simple algorithm to infer both these parameters and the agents' MUEs. We compute these using panel data from Uganda, and show that risk-sharing tests of covariate shocks using our computed MUEs deliver sensible results while the standard tests do not.

Suggested Citation

  • Ligon, Ethan, 2023. "Risk sharing tests and covariate shocks," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt2zr503fq, Department of Agricultural & Resource Economics, UC Berkeley.
  • Handle: RePEc:cdl:agrebk:qt2zr503fq
    as

    Download full text from publisher

    File URL: https://www.escholarship.org/uc/item/2zr503fq.pdf;origin=repeccitec
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. ., 1998. "The concept of sustainable economic development," Chapters, in: The Economics of Environment and Development, chapter 1, pages 1-21, Edward Elgar Publishing.
    2. Justin Caron & Thibault Fally & James R. Markusen, 2021. "International Trade Puzzles: A Solution Linking Production And Preferences," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 11, pages 199-250, World Scientific Publishing Co. Pte. Ltd..
    3. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(1), pages 209-244.
    4. Dean Karlan & Robert Osei & Isaac Osei-Akoto & Christopher Udry, 2014. "Agricultural Decisions after Relaxing Credit and Risk Constraints," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(2), pages 597-652.
    5. David K. Levine & William R. Zame, 2002. "Does Market Incompleteness Matter?," Econometrica, Econometric Society, vol. 70(5), pages 1805-1839, September.
    6. Arthur Lewbel, 2010. "Shape-Invariant Demand Functions," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 549-556, August.
    7. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    8. anonymous, 1998. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Sep.
    9. anonymous, 1998. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Dec.
    10. Manuela Angelucci & Giacomo De Giorgi, 2009. "Indirect Effects of an Aid Program: How Do Cash Transfers Affect Ineligibles' Consumption?," American Economic Review, American Economic Association, vol. 99(1), pages 486-508, March.
    11. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-956, October.
    12. Ogaki, Masao & Zhang, Qiang, 2001. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometrica, Econometric Society, vol. 69(2), pages 515-526, March.
    13. Harold Alderman & Christina H. Paxson, 1994. "Do the Poor Insure? A Synthesis of the Literature on Risk and Consumption in Developing Countries," International Economic Association Series, in: Edmar L. Bacha (ed.), Economics in a Changing World, chapter 3, pages 48-78, Palgrave Macmillan.
    14. Angus Deaton & Salman Zaidi, 2002. "Guidelines for Constructing Consumption Aggregates for Welfare Analysis," World Bank Publications, The World Bank, number 14101, April.
    15. Ligon, Ethan, 2016. "All λ-separable demands and rationalizing utility functions," Economics Letters, Elsevier, vol. 147(C), pages 16-18.
    16. Kaivan Munshi & Mark Rosenzweig, 2016. "Networks and Misallocation: Insurance, Migration, and the Rural-Urban Wage Gap," American Economic Review, American Economic Association, vol. 106(1), pages 46-98, January.
    17. anonymous, 1998. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Nov.
    18. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-114, Summer.
    19. Abhijit Banerjee & Esther Duflo & Rachel Glennerster & Cynthia Kinnan, 2015. "The Miracle of Microfinance? Evidence from a Randomized Evaluation," American Economic Journal: Applied Economics, American Economic Association, vol. 7(1), pages 22-53, January.
    20. Jushan Bai, 2009. "Panel Data Models With Interactive Fixed Effects," Econometrica, Econometric Society, vol. 77(4), pages 1229-1279, July.
    21. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-976, October.
    22. Rasmus Heltberg & Ana Mar�a Oviedo & Faiyaz Talukdar, 2015. "What do Household Surveys Really Tell Us about Risk, Shocks, and Risk Management in the Developing World?," Journal of Development Studies, Taylor & Francis Journals, vol. 51(3), pages 209-225, March.
    23. anonymous, 1998. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Aug.
    24. Duncan Thomas & Elizabeth Frankenberg, 2007. "Household Responses to the Financial Crisis in Indonesia: Longitudinal Evidence on Poverty, Resources, and Well-Being," NBER Chapters, in: Globalization and Poverty, pages 517-560, National Bureau of Economic Research, Inc.
    25. anonymous, 1998. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Jan.
    26. Townsend, Robert M, 1978. "On the Optimality of Forward Markets," American Economic Review, American Economic Association, vol. 68(1), pages 54-66, March.
    27. Blackorby, Charles & Donaldson, David, 1988. "Money metric utility: A harmless normalization?," Journal of Economic Theory, Elsevier, vol. 46(1), pages 120-129, October.
    28. McKenzie, David J., 2003. "How do Households Cope with Aggregate Shocks? Evidence from the Mexican Peso Crisis," World Development, Elsevier, vol. 31(7), pages 1179-1199, July.
    29. anonymous, 1998. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue May.
    30. K. J. Arrow, 1964. "The Role of Securities in the Optimal Allocation of Risk-bearing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 31(2), pages 91-96.
    31. anonymous, 1998. "Western economic developments," Western economic developments, Federal Reserve Bank of San Francisco, issue Jun.
    32. Bardhan, Pranab & Udry, Christopher, 1999. "Development Microeconomics," OUP Catalogue, Oxford University Press, number 9780198773719.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Paramasivam Ramasamy & Umanath Malaiarasan, 2023. "Agricultural credit in India: determinants and effects," Indian Economic Review, Springer, vol. 58(1), pages 169-195, June.
    2. Bozoglu, Mehmet & Ceyhan, Vedat, 2007. "Measuring the technical efficiency and exploring the inefficiency determinants of vegetable farms in Samsun province, Turkey," Agricultural Systems, Elsevier, vol. 94(3), pages 649-656, June.
    3. Atanu Sengupta & Ujjwal Seth, 2022. "Voice After a Long Silence: Measuring Surplus Labour in the India’s Unorganised Sector," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 65(4), pages 951-966, December.
    4. Mauricio De Rosa, 2022. "On Capital: an essay on inequality, capital and value theory," Documentos de Trabajo (working papers) 22-08, Instituto de Economía - IECON.
    5. Bertoli, Simone & Marchetta, Francesca, 2015. "Bringing It All Back Home – Return Migration and Fertility Choices," World Development, Elsevier, vol. 65(C), pages 27-40.
    6. Ghazala Azmat & Vicente Cunãt & Emeric Henry, 2020. "Gender Promotion Gaps: Career Aspirations and Workplace Discrimination," SciencePo Working papers Main hal-03393067, HAL.
    7. Stark, Oded & Pang, Yu & Fan, Simon, 2024. "Agglomeration, Pollution, and Migration: A Substantial Link, and Policy Design," EconStor Open Access Book Chapters, in: World Scientific Handbook of Global Migration, Volume 3: Types of Migrants and Economies: A Global Perspective, pages 199-225, ZBW - Leibniz Information Centre for Economics.
    8. Sarolta Laczo, 2010. "Estimating Dynamic Contracts: Risk Sharing in Village Economies," 2010 Meeting Papers 687, Society for Economic Dynamics.
    9. M. Shahe Emran & A. K. M. Mahbub Morshed & Joseph E. Stiglitz, 2021. "Microfinance and missing markets," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 34-67, February.
    10. Chen, Qingxin & Fu, Chenyi & Zhu, Ning & Ma, Shoufeng & He, Qiao-Chu, 2023. "A target-based optimization model for bike-sharing systems: From the perspective of service efficiency and equity," Transportation Research Part B: Methodological, Elsevier, vol. 167(C), pages 235-260.
    11. De Weerdt, Joachim & Dercon, Stefan, 2006. "Risk-sharing networks and insurance against illness," Journal of Development Economics, Elsevier, vol. 81(2), pages 337-356, December.
    12. Gift Dafuleya & Fiona Tregenna, 2021. "How effectively do households insure food consumption and assets against funeral expenses? The case of urban Zimbabwe," Review of Economics of the Household, Springer, vol. 19(4), pages 987-1021, December.
    13. John T. H. Wong & Matthias Hei Man & Alex Li Cheuk Hung, 2022. "Population and Technological Growth: Evidence from Roe v. Wade," Papers 2211.00410, arXiv.org.
    14. Liu, Yan & Heerink, Nico & Li, Fan & Shi, Xiaoping, 2022. "Do agricultural machinery services promote village farmland rental markets? Theory and evidence from a case study in the North China plain," Land Use Policy, Elsevier, vol. 122(C).
    15. Ahmet Faruk Aysan & Dilek Demirbas & Mustafa Disli & Monica Parra, 2021. "Resilience and Path Dependency: Income Distribution Effects of GDP in Colombia," Working Papers hal-03365148, HAL.
    16. Ciula, Raffaele, 2005. "The Effects of Income Inequality on Economic Growth," MPRA Paper 116273, University Library of Munich, Germany.
    17. Le-Yin Zhang, 2003. "Economic Development in Shanghai and the Role of the State," Urban Studies, Urban Studies Journal Limited, vol. 40(8), pages 1549-1572, July.
    18. McKenzie, David & Mohpal, Aakash & Yang, Dean, 2022. "Aspirations and financial decisions: Experimental evidence from the Philippines," Journal of Development Economics, Elsevier, vol. 156(C).
    19. Catherine Crawford & Sarah Bell, 2012. "Analysing the Relationship between Urban Livelihoods and Water Infrastructure in Three Settlements in Cusco, Peru," Urban Studies, Urban Studies Journal Limited, vol. 49(5), pages 1045-1064, April.
    20. Kasturi Sadhu & Saumya Chakrabarti, 2021. "Neo-Dualism: Accumulation, Distress, and Proliferation of a Fissured Informality," Review of Radical Political Economics, Union for Radical Political Economics, vol. 53(4), pages 694-724, December.

    More about this item

    Keywords

    Social and Behavioral Sciences; Risk sharing; covariate shocks; Constant Frisch Elasticity demands; Uganda;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cdl:agrebk:qt2zr503fq. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lisa Schiff (email available below). General contact details of provider: https://edirc.repec.org/data/dabrkus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.