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Informal Insurance Arrangements in Village Economies

  • Ethan Ligon
  • Jonathan P. Thomas
  • Tim Worrall

Recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income, thus rejecting the hypothesis of full risk-pooling. We attempt to explain these observations by adding limited commitment as an impediment to risk-pooling. We provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment, and test the model using data from from three Indian villages. We find that the model can fully explain the dynamic response of consumption to income, but that it fails to explain the distribution of consumption across households.

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File URL: http://www.keele.ac.uk/depts/ec/wpapers/9708.pdf
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Paper provided by Department of Economics, Keele University in its series Keele Department of Economics Discussion Papers (1995-2001) with number 97/08.

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Date of creation: 1997
Date of revision: Oct 2000
Publication status: Published in Review of Economic Studies, Volume 69, January, 2002, pages 209-244.
Handle: RePEc:kee:keeldp:97/08
Contact details of provider: Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
Web page: http://www.keele.ac.uk/depts/ec/cer/
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Order Information: Postal: Department of Economics, Keele University, Keele, Staffordshire ST5 5BG - United Kingdom
Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm Email:


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