Risk and Return in Village Economies

Krislert Samphantharak and Robert Townsend

No 27, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: This paper provides a theory-based empirical framework for understanding the risk and return on productive capital assets and their allocation across activities in an economy characterized by idiosyncratic and aggregate risk and thin formal markets for real and financial assets. We apply our framework to households running business enterprises in Thai villages with extensive networks, taking advantage of panel data: income, assets, consumption, gifts, and loans. We decompose risk and estimate the risk premia faced by households, distinguishing aggregate risk from idiosyncratic, potentially diversifiable risk. This distinction matters for estimating measures of underlying productivity and has important policy implications.

Keywords: Rate of Return; Aggregate Risk; Idiosyncratic Risk; Household Enterprise; Risk Sharing; Kinship Networks; Village Economy; Asset Pricing; CAPM; Risk Premium; Risk-Adjusted Return; Productivity (search for similar items in EconPapers)
JEL-codes: D12 D13 G11 L23 L26 O12 O16 O17 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2016-05
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