An Empirical Investigation of Risk Sharing among Indonesian Households

This study investigates the formation of risk-sharing group in circumstances where households face barriers to insurance. We test alternative risk sharing models which include full risk sharing, borrowing-saving and private information about income and efforts. Using the Indonesia Family Life Survey (IFLS) dataset, this study provides evidence that the full risk-sharing hypothesis fails. There is some evidence that IFLS households smooth consumption using the credit market. No evidence is found in favor of risk sharing models with private information about effort and productivity. We then explore the possibility of Indonesian households forming stable informal risk sharing groups to mitigate idiosyncratic consumption risks. We find strong evidence of such endogenous group formation among IFLS households as a vehicle of informal risk sharing.