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Risk and Return in Village Economies

  • Krislert Samphantharak
  • Robert Townsend

This paper provides a theory-based empirical framework for understanding the risk and return on productive capital assets and their allocation across activities in an economy characterized by idiosyncratic and aggregate risk and thin formal markets for real and financial assets. We apply our framework to households running business enterprises in Thai villages with extensive networks, taking advantage of panel data: income, assets, consumption, gifts, and loans. We decompose risk and estimate the risk premia faced by households, distinguishing aggregate risk from idiosyncratic, potentially diversifiable risk. This distinction matters for estimating measures of underlying productivity and has important policy implications.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19738.

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Date of creation: Dec 2013
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Handle: RePEc:nbr:nberwo:19738
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