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An Empirical Investigation of Risk Sharing among Indonesian Households

Parantap Basu and Sigit Wibowo ()

No 2017_03, CEGAP Working Papers from Durham University Business School

Abstract: This study investigates the barriers to risk-sharing among Indonesian households. We test alternative risk sharing models, namely full risk sharing, borrowing-saving, saving only, hidden income, moral hazard and limited commitment among households. Based on three waves of the Indonesia Family Life Survey (IFLS) dataset, we nd that the full risk-sharing hypothesis fails. A nested regression framework suggested by Kinnan (2014) provides evidence in favor of the hidden income hypothesis. However, such a nested framework is unable to discriminate between moral hazard and limited commitment. This motivates us to resort to a non-nested framework. Within this non-nested framework, we test two risk sharing models: (i) the Kocherlakota-Pistaferri (2010) moral hazard model with full commitment and (ii) the Ligon et al. (2002) dynamic limited commitment model. IFLS data reject (i) but there is weak evidence of (ii). Based on this, we conclude that there are two hidden barriers to risk sharing among the IFLS households, namely hidden income and limited commitment.

New Economics Papers: this item is included in nep-dev and nep-sea
Date: 2017-05
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Working Paper: An Empirical Investigation of Risk Sharing among Indonesian Households (2015) Downloads
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