Decreasing Relative Risk Aversion and Tests of Risk Sharing
The relative risk aversion (RRA) coefficient of a household whose consumption is close to the subsistence level may be very high. For example, if consumption is exactly at the subsistence level, the household may not be willing to bear any risk. If this is the case, then the RRA coefficient must be a decreasing function of wealth for poor households. Therefore we should allow the possibility of decreasing RRA (DRRA) in testing the full risk sharing hypothesis. However, existing tests in the empirical literature are derived using preferences that exhibit either increasing or constant RRA even when they are applied to data containing low-income households. We therefore use a Hyperbolic Absolute Risk Aversion (HARA) utility, which implies increasing, constant, and decreasing RRA as special cases, to test full risk-sharing hypothesis. Using the International Food Policy Research Institute (IFPRI) and the International Crops Research Institute of the Semi-Arid Tropics (ICRISAT) household level data sets, we find evidence in support of the DRRA hypothesis, along with evidence favoring full risk-sharing hypothesis at the village level, and evidence against the hypothesis at the inter-village level. When RRA is restricted to be constant, we replicate the previous results in the literature: reject the full risk-sharing hypothesis at both levels. Our tests, however, reject this restriction and favor DRRA in almost all cases. These results suggest that it is important to allow for DRRA in testing the full risk-sharing hypothesis when data containing low-income households are investigated.
|Date of creation:||01 Aug 2000|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sumru Altug & Robert Miller, .
"Household Choices in Equilibrium,"
University of Chicago - Population Research Center
87-8, Chicago - Population Research Center.
- Kessler, Denis & Wolff, Edward N, 1991. "A Comparative Analysis of Household Wealth Patterns in France and the United States," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 37(3), pages 249-66, September.
- Townsend, Robert M, 1994.
"Risk and Insurance in Village India,"
Econometric Society, vol. 62(3), pages 539-91, May.
- Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
- Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
- Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996.
"Income Risk, Borrowing Constraints, and Portfolio Choice,"
American Economic Review,
American Economic Association, vol. 86(1), pages 158-72, March.
- Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
- Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
- Robert M. Townsend, 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 83-102, Summer.
- Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-94, March.
- Rosenzweig, Mark R. & Binswanger, Hans P., 1992.
"Wealth, weather risk, and the composition and profitability of agricultural investments,"
Policy Research Working Paper Series
1055, The World Bank.
- Rosenzweig, Mark R & Binswanger, Hans P, 1993. "Wealth, Weather Risk and the Composition and Profitability of Agricultural Investments," Economic Journal, Royal Economic Society, vol. 103(416), pages 56-78, January.
- Rosenzweig, Mark R. & Binswanger, Hans P., 1989. "Wealth, Weather Risk and the Composition and Profitability of Agricultural Investments," Bulletins 7455, University of Minnesota, Economic Development Center.
- Atkeson, A. & Ogaki, M., 1991.
"Wealth-Varying Intertemporal Elasticities of Substitution Evidence from Panel and Aggregate Data,"
RCER Working Papers
303, University of Rochester - Center for Economic Research (RCER).
- Atkeson, Andrew & Ogaki, Masao, 1996. "Wealth-varying intertemporal elasticities of substitution: Evidence from panel and aggregate data," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 507-534, December.
- Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
- Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
- Masao Ogaki & Andrew Atkeson, 1997. "Rate Of Time Preference, Intertemporal Elasticity Of Substitution, And Level Of Wealth," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 564-572, November.
- Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:1588. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.