Heterogeneity and Risk-Sharing in Village Economies

Pierre-Andre Chiappori
Krislert Samphantharak
Sam Schulhofer-Wohl
Robert M. Townsend
Publication Type: 
Papers
Publication Article File: 
Journal Name: 
Quantitative Economics
Journal Volume: 
Forthcoming
Publication Year: 
2013

We show how to use panel data on household consumption to directly estimate households' risk preferences. Specifically, we measure heterogeneity in risk aversion among households in Thai villages using a full risk-sharing model, which we then test allowing for this heterogeneity. There is substantial, statistically significant heterogeneity in estimated risk preferences. Full insurance cannot be rejected. As the risk sharing, as-if-complete-markets theory might predict, estimated risk preferences are unrelated to wealth or other characteristics. The heterogeneity matters for policy: Although the average household would benefit from eliminating village-level risk, less-risk-averse households who are paid to absorb that risk would be worse o_ by several percent of household consumption.

Read More: "The Rich Complexity of Village Life," by the Federal Reserve, discusses the findings and implications of this paper.

JEL Codes: 
D12, D14, D53, D81, D91, G11, O16
Region: 
East Asia and the Pacific
Country: 
Thailand
Topic: 
General Equilibrium
Topic: 
Economic Modeling
Topic: 
Insurance
Topic: 
Risk
Topic: 
Consumption
Topic: 
Policy Evaluation
Topic: 
Growth