This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. Forthcoming Articles
  5. Risk Sharing Tests and Covariate Shocks: Drought, Floods, and Pests in Uganda

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Risk Sharing Tests and Covariate Shocks: Drought, Floods, and Pests in Uganda

  • Ethan Ligon
American Economic Review (Forthcoming)

Abstract

Efficient risk-sharing implies a simple factor structure for marginal utilities of expenditure (MUEs): Pareto weights divided by a common price. The standard approach infers MUEs from total expenditures, implicitly assuming homothetic preferences, unitary income elasticities, and identical price elasticities. Risk-sharing tests using total expenditures work for idiosyncratic shocks (budgets change, but not prices), but not “covariate” shocks (prices change). We describe all preferences which permit one to infer MUEs from expenditures, and estimate nonhomothetic MUEs to test whether covariate shocks are shared efficiently in Uganda. This delivers sensible results; the standard approach suggests that droughts, floods, and pests are beneficial.

Downloads