Risk-Sharing Networks among Households in Rural Ethiopia
We apply the set-up of limited commitment model to empirically test the role of informal risk-sharing networks using panel data on informal credit transactions from rural Ethiopia. The empirical estimates provide convincing evidence for the belief that enforcement problem limits the direct role of credit transactions in risk-sharing arrangements between rural households, whether the villages are ethnically homogeneous or not. We also find that households with more land have better access to the informal credit market and access is significantly improved through their participation in small group networks. But the informal credit market and the networks under consideration serve little purpose to the land poor households. These results, therefore, imply that full risk-sharing does not appear to materialize at the village level.
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