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Formal and Informal Risk Sharing in LDCs: Theory and Empirical Evidence

  • Dubois, Pierre
  • Jullien, Bruno
  • Magnac, Thierry

We develop and estimate a model of dynamic interactions where conmmitment is limited and contracts are incomplete to explain the patterns of income and consumption in village economies of less developped countries. Households can insure through both formal contracts and informal agreements, that is, agreements specifying voluntary transfers that need to be self-enforceable. This theoretical setting nests the case of complete markets when all riks can be insured by formal contracts and the case where only informal agreements are available. We derive a non-linear system of equations of interest for income and consumption. A key prediction of our model is that income and consumption are affected by lagged consumption as a consequence of the coexistence of formal and informal contracting possibilities. Using semi-parametric specifications, we prove identification, derive testable restrictions and estimate the model using data from Pakistan villages. Empirical results are consistent with the economic arguments. Incentive constraints due to self-enforcement bind with positive probability and formal contracts are used to reduce this probability. ...French Abstract : Les auteurs développent un modèle d'interactions dynamiques avec engagement limité et contrats incomplets pour expliquer les profils de revenu et de consommation dans les économies villageoises des pays en développement. Les ménages peuvent s'assurer à travers des accords formels et informels, c'est-à-dire, des accords spécifiant des transferts volontaires qui doivent être auto-exécutoire. Ils obtiennent un système d'équations non linéraires de revenu et de consommation. Une des prédictions clé du modèle est que le revenu et la consommation sont affectés par la consommation retardée à cause de la coexistence de contrats formels et informels. En utilisant une spécification semi-paramétrique, les auteurs prouvent l'identification et ils dérivent des restrictions testables qu'ils estiment sur des données du Pakist

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 351.

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Date of creation: May 2005
Date of revision: Dec 2007
Publication status: Published in Econometrica, vol.�76, n°4, juillet 2008, p.�679-725.
Handle: RePEc:ide:wpaper:2829
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