Inferring informal risk-sharing regimes: Evidence from rural Tanzania

Zhimin Li and Ethan Ligon

Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: This paper studies informal risk-sharing regimes in a unified framework by examining intertemporal consumption behavior of rural households in Tanzania. We exploit a theoretically-consistent link between interest rates and cross-sectional consumption moments to test alternative risk-sharing models without requiring data on interest rates or assuming a restriction to eliminate the need for such data, which are often unavailable in developing economies. We specify tests that allow us to distinguish among models even with temporal dependence in income shocks. Our analysis shows that the consumption pattern in rural Tanzania is consistent with the self-insurance regime, and that risk aversion varies substantially across districts. Imposing a strict condition on interest rates, as often done in prior literature, misses their intertemporal heterogeneity and biases the estimation of risk aversion.

Keywords: Social and Behavioral Sciences; Risk Sharing; Full Insurance; Self-Insurance; Private Information (search for similar items in EconPapers)
Date: 2020-09-01
New Economics Papers: this item is included in nep-agr, nep-dev and nep-ias
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Journal Article: Inferring informal risk-sharing regimes: Evidence from rural Tanzania (2020)
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