Tobias Broer: "Risk-Sharing in Village Economies Revisited"

BB-Seminar: Tobias Broer, Institute for International Economic Studies, Stockholm University, presents "Risk-Sharing in Village Economies Revisited" (Joint work with Tessa Bold)

Abstract:

The limited commitment model is popular for the analysis of village risk-sharing as it captures both the observed partial character of insurance and the presumption that incomes are well observed but formal contracts absent in rural communities. We are the first to quantitatively study limited enforcement when individuals can form new, smaller coalitions after reneging in a larger group, which makes group size an endogenous outcome of the model. This is important for theoretical consistency, but also because we show that enforcement constraints, which typically bind only in case of positive income shocks, actually imply strongly counterfactual asymmetries in the consumption process at usual village sizes, but not in small groups. The results show how equilibrium group sizes are much smaller than the typical village, bringing the predicted consumption process in line with the data. We thus argue that allowing for endogenous group formation in the dynamic limited commitment model strongly improves its predictive power for analyzing risk-sharing in village economies.

Organizer

Macroinequality
Published Feb. 18, 2016 1:52 PM