We thank Joan Gieseke for editorial assistance. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
Heterogeneity and risk sharing in village economies
Article first published online: 31 MAR 2014
Copyright © 2014 Pierre-André Chiappori, Krislert Samphantharak, Sam Schulhofer-Wohl, and Robert M. Townsend
Volume 5, Issue 1, pages 1–27, March 2014
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How to Cite
Chiappori, P.-A., Samphantharak, K., Schulhofer-Wohl, S. and Townsend, R. M. (2014), Heterogeneity and risk sharing in village economies. Quantitative Economics, 5: 1–27. doi: 10.3982/QE131
- Issue published online: 31 MAR 2014
- Article first published online: 31 MAR 2014
- Submitted January, 2011. Final version accepted June, 2013.
- Risk preferences;
- complete markets;
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 that are paid to absorb that risk would be worse off by several percent of household consumption.