Consumption Smoothing, Risk Sharing and Household Vulnerability in Rural Mexico

This study empirically analyzes risk-sharing functioning in rural Mexico. It also aims to examine the vulnerability of rural households and whether the conditional cash transfer (CCT) program will reduce the vulnerability within the risk-sharing framework. I adopt the two most recent Mexican rural household panel data for 2003 and 2007—although rich in information, the data have not been fully utilized given the lack of pure control groups. Drawing on Townsend's (1994) risk sharing model, the empirical results reject the hypothesis of full risk sharing but confirm that risk-sharing functions serve better in securing basic needs such as food. In addition, the risk-sharing function, reinforced by longer exposures to the CCT program, serves to mitigate the liquidity constraints or vulnerability of poor households.