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Testing Efficient Risk Sharing with Heterogeneous Risk Preferences: Semi-parametric Tests with an Application to Village Economies

Author

Listed:
  • Maurizio Mazzocco

    (Economics University of Wisconsin-Madison)

  • Shiv Saini

Abstract

Previous tests of efficient risk sharing have assumed that households have identical risk preferences. This assumption is equivalent to the restriction that households can pool their resources, but cannot optimally allocate them according to individual risk preferences. In this paper, we first test the hypothesis of homogeneous risk preferences and reject it. This result implies that previous tests should have rejected efficiency even if households are perfectly sharing risk. We then derive two tests of efficient risk sharing that allow for heterogeneity in risk preferences. Using the two tests we cannot reject efficient risk sharing

Suggested Citation

  • Maurizio Mazzocco & Shiv Saini, 2006. "Testing Efficient Risk Sharing with Heterogeneous Risk Preferences: Semi-parametric Tests with an Application to Village Economies," 2006 Meeting Papers 108, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:108
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    References listed on IDEAS

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    Cited by:

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    2. Marcos Rangel & Imran Rasul & Giacomo de Giorgi & Manuela Angelucci, 2009. "Insurance, Investment, And The Extended Family," 2009 Meeting Papers 24, Society for Economic Dynamics.

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    More about this item

    Keywords

    Risk Sharing; Efficiency; Heterogeneous Risk Preferences;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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