Recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income, thus rejecting the hypothesis of full risk-pooling. We attempt to explain these observations by adding limited commitment as an impediment to risk-pooling. We provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment, and test the model using data from from three Indian villages. We find that the model can fully explain the dynamic response of consumption to income, but that it fails to explain the distribution of consumption across households.
More papers in Keele Department of Economics Discussion Papers (1995-2001) from Department of Economics, Keele University Address: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom Contact information at EDIRC. Series data maintained by Martin E. Diedrich (). This e-mail address is bad, please contact .