Testing Efficient Risk Sharing with Heterogeneous Risk Preferences: Semi-parametric Tests with an Application to Village Economies

Maurizio Mazzocco () and Shiv Saini
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Maurizio Mazzocco: Economics University of Wisconsin-Madison

No 108, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: Previous tests of efficient risk sharing have assumed that households have identical risk preferences. This assumption is equivalent to the restriction that households can pool their resources, but cannot optimally allocate them according to individual risk preferences. In this paper, we first test the hypothesis of homogeneous risk preferences and reject it. This result implies that previous tests should have rejected efficiency even if households are perfectly sharing risk. We then derive two tests of efficient risk sharing that allow for heterogeneity in risk preferences. Using the two tests we cannot reject efficient risk sharing

Keywords: Risk Sharing; Efficiency; Heterogeneous Risk Preferences (search for similar items in EconPapers)
JEL-codes: D11 D12 O10 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-dev
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Citations: View citations in EconPapers (3)

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