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Risk-Sharing in Village Economies Revisited


  • Tobias Broer

    (Stockholm University)

  • Tessa Bold

    (Goethe University)


The limited enforcement model is popular for the analysis of village risk-sharing as it captures both the observed degree of insurance and the presumption that incomes are well observed but formal contracts absent in rural communities. Enforcement constraints in insurance contracts, however, typically bind only in case of positive income shocks, when the outside option of leaving the village is attractive. We show how this results in strongly counterfactual asymmetries in the consumption process at usual village sizes. When households can renege on informal contracts together with other villagers, however, the size of insurance groups becomes endogenous, and is usually much smaller than typical villages. This brings the predicted consumption process, which is more symmetric in small groups, in line with observed data. We thus argue that village risk-sharing should be replaced by neighbourhood, or kinship, risk-sharing.

Suggested Citation

  • Tobias Broer & Tessa Bold, 2015. "Risk-Sharing in Village Economies Revisited," 2015 Meeting Papers 1232, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:1232

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    References listed on IDEAS

    1. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
    2. Sarolta Laczó, 2015. "Risk Sharing With Limited Commitment And Preference Heterogeneity: Structural Estimation And Testing," Journal of the European Economic Association, European Economic Association, vol. 13(2), pages 265-292, April.
    3. Tobias Broer, 2013. "The Wrong Shape of Insurance? What Cross-Sectional Distributions Tell Us about Models of Consumption Smoothing," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 107-140, October.
    4. Ogaki, Masao & Zhang, Qiang, 2001. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometrica, Econometric Society, vol. 69(2), pages 515-526, March.
    5. Maurizio Mazzocco & Shiv Saini, 2012. "Testing Efficient Risk Sharing with Heterogeneous Risk Preferences," American Economic Review, American Economic Association, vol. 102(1), pages 428-468, February.
    6. Charles F. Manski, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 531-542.
    7. Tessa Bold, 2009. "Implications of Endogenous Group Formation for Efficient Risk-Sharing," Economic Journal, Royal Economic Society, vol. 119(536), pages 562-591, March.
    8. Emla Fitzsimons & Bansi Malde & Marcos Vera-Hernandez, 2015. "Group size and the efficiency of informal risk sharing," IFS Working Papers W15/31, Institute for Fiscal Studies.
    9. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1990. "Toward a Theory of Discounted Repeated Games with Imperfect Monitoring," Econometrica, Econometric Society, vol. 58(5), pages 1041-1063, September.
    10. Attanasio, Orazio & Rios-Rull, Jose-Victor, 2000. "Consumption smoothing in island economies: Can public insurance reduce welfare?," European Economic Review, Elsevier, vol. 44(7), pages 1225-1258, June.
    11. Alexander Karaivanov & Robert M. Townsend, 2014. "Dynamic Financial Constraints: Distinguishing Mechanism Design From Exogenously Incomplete Regimes," Econometrica, Econometric Society, vol. 82(3), pages 887-959, May.
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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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