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Testing Efficient Risk Sharing with Heterogeneous Risk Preferences: Semi-parametric Tests with an Application to Village Economies

Author

Listed:
  • Maurizio Mazzocco

    () (Economics University of Wisconsin-Madison)

  • Shiv Saini

Abstract

Previous tests of efficient risk sharing have assumed that households have identical risk preferences. This assumption is equivalent to the restriction that households can pool their resources, but cannot optimally allocate them according to individual risk preferences. In this paper, we first test the hypothesis of homogeneous risk preferences and reject it. This result implies that previous tests should have rejected efficiency even if households are perfectly sharing risk. We then derive two tests of efficient risk sharing that allow for heterogeneity in risk preferences. Using the two tests we cannot reject efficient risk sharing

Suggested Citation

  • Maurizio Mazzocco & Shiv Saini, 2006. "Testing Efficient Risk Sharing with Heterogeneous Risk Preferences: Semi-parametric Tests with an Application to Village Economies," 2006 Meeting Papers 108, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:108
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    File URL: http://repec.org/sed2006/up.14118.1138223003.pdf
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    References listed on IDEAS

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    1. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-956, October.
    2. Ogaki, Masao & Zhang, Qiang, 2001. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometrica, Econometric Society, vol. 69(2), pages 515-526, March.
    3. Whitney K. Newey & James L. Powell & Francis Vella, 1999. "Nonparametric Estimation of Triangular Simultaneous Equations Models," Econometrica, Econometric Society, vol. 67(3), pages 565-604, May.
    4. Martin Ravallion & Shubham Chaudhuri, 1997. "Risk and Insurance in Village India: Comment," Econometrica, Econometric Society, vol. 65(1), pages 171-184, January.
    5. Powell, James L & Stock, James H & Stoker, Thomas M, 1989. "Semiparametric Estimation of Index Coefficients," Econometrica, Econometric Society, vol. 57(6), pages 1403-1430, November.
    6. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-294, March.
    7. Horowitz, Joel L., 2002. "Bootstrap critical values for tests based on the smoothed maximum score estimator," Journal of Econometrics, Elsevier, vol. 111(2), pages 141-167, December.
    8. Robinson, Peter M, 1988. "Root- N-Consistent Semiparametric Regression," Econometrica, Econometric Society, vol. 56(4), pages 931-954, July.
    9. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 537-579.
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    Cited by:

    1. Marcos Rangel & Imran Rasul & Giacomo de Giorgi & Manuela Angelucci, 2009. "Insurance, Investment, And The Extended Family," 2009 Meeting Papers 24, Society for Economic Dynamics.

    More about this item

    Keywords

    Risk Sharing; Efficiency; Heterogeneous Risk Preferences;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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