Working Paper 683

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Heterogeneity and Risk Sharing in Village Economies

Pierre-Andre Chiappori
Krislert Samphantharak
Sam Schulhofer-Wohl - Senior Vice President and Director of Research
Robert Townsend - Economics Professor, University of Chicago

Revised July 9, 2012

We show how to use panel data on household consumption to directly estimate households’ risk preferences. Specifically, we measure heterogeneity in risk aversion among households in Thai villages using a full risk-sharing model, which we then test allowing for this heterogeneity. There is substantial, statistically significant heterogeneity in estimated risk preferences. Full insurance cannot be rejected. As the risk sharing, as-if-complete-markets theory might predict, estimated risk preferences are unrelated to wealth or other characteristics. The heterogeneity matters for policy: Although the average household would benefit from eliminating village-level risk, less-risk-averse households who are paid to absorb that risk would be worse off by several percent of household consumption.

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