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Optimal Risk Sharing Under Limited Commitment: Evidence From Rural Vietnam

Author

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  • Patrick Eozenou

    (European University Institute, Villa San Paolo, Via Della Piazzuola 43, 50133 Florence, Italy)

Abstract

We use panel data from a household survey conducted in Vietnam to analyze the effectiveness of informal risk sharing arrangements in protecting household consumption from idiosyncratic income shocks. We focus on the effects of reported harvest shocks and of estimated shocks to agricultural revenues on adult equivalent consumption. The full-insurance allocation is tested against a specified alternative under which contracts are not fully enforceable ex-post. We find that farmers hit by unfavorable events stabilize their consumption level below the village aggregate level, irrespective of the level of realized shocks. At the same time, farmers experiencing more favorable shocks enjoy higher consumption in proportion to the realized value of idiosyncratic shocks. Together, these finding are consistent with a simple 2-period model of optimal risk sharing with one-sided limited commitment. These results hold for total consumption and for non-durable consumption. We also find however some evidence supporting the full insurance hypothesis for food consumption.

Suggested Citation

  • Patrick Eozenou, 2009. "Optimal Risk Sharing Under Limited Commitment: Evidence From Rural Vietnam," Working Papers 58, Development and Policies Research Center (DEPOCEN), Vietnam.
    • Handle: RePEc:dpc:wpaper:0609
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    Cited by:

    1. Tobias Broer, 2013. "The Wrong Shape of Insurance? What Cross-Sectional Distributions Tell Us about Models of Consumption Smoothing," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 107-140, October.
    2. Thang T. Vo, 2024. "Adverse shocks, vulnerability, and coping by rural households in Vietnam," Development Policy Review, Overseas Development Institute, vol. 42(4), July.

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    Keywords

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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