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American Economic Review: Vol. 102 No. 1 (February 2012)

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Testing Efficient Risk Sharing with Heterogeneous Risk Preferences

Article Citation

Mazzocco, Maurizio, and Shiv Saini. 2012. "Testing Efficient Risk Sharing with Heterogeneous Risk Preferences." American Economic Review, 102(1): 428-68.

DOI: 10.1257/aer.102.1.428

Abstract

We propose a method that enables one to test efficient risk sharing even when households have different risk preferences. The method is composed of three tests. The first one determines whether in the data households have homogeneous risk preferences. The second and third tests evaluate efficient risk sharing when the hypothesis of homogeneous risk preferences is rejected. We use this method to test efficient risk sharing in rural India. Using the first test, we strongly reject the hypothesis of identical risk preferences. Using the second and third tests, we reject efficiency at the village but not at the caste level. (JEL D12, D86, G22, O12, O18, R23, Z13)

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Authors

Mazzocco, Maurizio (UCLA)
Saini, Shiv (Cornerstone Research, New York, NY)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
D86: Economics of Contract: Theory
G22: Insurance; Insurance Companies
O12: Microeconomic Analyses of Economic Development
O18: Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
R23: Urban, Rural, Regional, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics
Z13: Economic Sociology; Economic Anthropology; Social and Economic Stratification


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