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An Empirical Investigation of Risk Sharing among Indonesian Households

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  • Parantap Basu

    (Durham University, Durham University Business School)

  • Sigit S. Wibowo

    (Universitas Indonesia, Depok)

Abstract

This study investigates the barriers to risk-sharing among Indonesian households. We test alternative risk sharing models, namely full risk sharing, borrowing-saving, saving only, hidden income, moral hazard and limited commitment among households. Based on three waves of the Indonesia Family Life Survey (IFLS) dataset, we nd that the full risk-sharing hypothesis fails. A nested regression framework suggested by Kinnan (2014) provides evidence in favor of the hidden income hypothesis. However, such a nested framework is unable to discriminate between moral hazard and limited commitment. This motivates us to resort to a non-nested framework. Within this non-nested framework, we test two risk sharing models: (i) the Kocherlakota-Pistaferri (2010) moral hazard model with full commitment and (ii) the Ligon et al. (2002) dynamic limited commitment model. IFLS data reject (i) but there is weak evidence of (ii). Based on this, we conclude that there are two hidden barriers to risk sharing among the IFLS households, namely hidden income and limited commitment.

Suggested Citation

  • Parantap Basu & Sigit S. Wibowo, 2017. "An Empirical Investigation of Risk Sharing among Indonesian Households," CEMAP Working Papers 2017_03, Durham University Business School.
    • Handle: RePEc:dur:cegapw:2017_03
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