Mobile Phone Expansion, Informal Risk Sharing, and Consumption Smoothing: Evidence from Rural Uganda

We study how the recent expansion of mobile phone coverage affects the degree of consumption smoothing using data collected in rural Uganda in 2003 and 2005. We found that mobile phone coverage helps consumption smoothing against covariate shocks but not idiosyncratic shocks. Unlike in studies on informal risk sharing, but in line with the permanent income hypothesis, we also found that household-level consumption changes are insenitive to transitory household income shocks, but sensitive to permanent household income shocks. Full intertemporal self-insurance is, however, impossible under imperfect credit and insurance markets. Our results show that households effectively combine self-insurance, local risk sharing, and long-distance risk sharing via mobile phone, where idiosyncratic shocks are partially mitigated by self-insurance as well as mutual insurance within local communities, while covariate shocks are partially mitigated by self-insurance and across distant communities via mobile phones.