Distinguishing barriers to insurance in Thai villages

In both developing and developed countries, consumption insurance is incomplete: consumption co-moves with income. Models with limited commitment, moral hazard, and hidden income have been proposed to explain this lack of full insurance. Limited commitment and moral hazard have generally been found to fit the data better than full insurance or permanent income models, but these models have not been tested against the alternative of hidden income. I show that the way history matters in forecasting consumption can be used to distinguish the hidden income model from other models of incomplete insurance. I also argue that accounting for measurement error in consumption is important in identifying barriers to insurance. In a ten-year panel from rural Thailand, neither limited commitment or moral hazard can fully explain the relationship between income and consumption--the need to give households incentives to truthfully reveal their income appears to play a role in constraining insurance.