Optimal Risk Sharing Under Limited Commitment: Evidence From Rural Vietnam

Patrick Eozenou ()

No 6, Working Papers from Development and Policies Research Center (DEPOCEN), Vietnam

Abstract: We use panel data from a household survey conducted in Vietnam to analyze the effectiveness of informal risk sharing arrangements in protecting household consumption from idiosyncratic income shocks. We focus on the effects of reported harvest shocks and of estimated shocks to agricultural revenues on adult equivalent consumption. The full-insurance allocation is tested against a specified alternative under which contracts are not fully enforceable ex-post. We find that farmers hit by unfavorable events stabilize their consumption level below the village aggregate level, irrespective of the level of realized shocks. At the same time, farmers experiencing more favorable shocks enjoy higher consumption in proportion to the realized value of idiosyncratic shocks. Together, these finding are consistent with a simple 2-period model of optimal risk sharing with one-sided limited commitment. These results hold for total consumption and for non-durable consumption. We also find however some evidence supporting the full insurance hypothesis for food consumption.

Keywords: Consumption; Risk-sharing; Informal Insurance; Vietnam. (search for similar items in EconPapers)
JEL-codes: D8 I3 O1 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2009
New Economics Papers: this item is included in nep-agr, nep-dev and nep-ias
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Citations: View citations in EconPapers (1)

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Working Paper: Optimal Risk Sharing Under Limited Commitment: Evidence From Rural Vietnam (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:dpc:wpaper:0609

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