Creator: Chiappori, Pierre-André, Samphantharak, Krislert, Schulhofer-Wohl, Sam, and Townsend, Robert M. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 483 Abstract:
We show how to use panel data on household consumption to directly estimate households’ risk preferences. Specifically, we measure heterogeneity in risk aversion among households in Thai villages using a full risk-sharing model, which we then test allowing for this heterogeneity. There is substantial, statistically significant heterogeneity in estimated risk preferences. Full insurance cannot be rejected. As the risk sharing, as-if-complete-markets theory might predict, estimated risk preferences are unrelated to wealth or other characteristics. The heterogeneity matters for policy: Although the average household would benefit from eliminating village-level risk, less-risk-averse households who are paid to absorb that risk would be worse off by several percent of household consumption.
Keyword: Complete markets, Insurance, Heterogeneity, and Risk preferences Subject (JEL): G11 - Portfolio Choice; Investment Decisions, O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance, D14 - Household Saving; Personal Finance, D12 - Consumer Economics: Empirical Analysis, D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, D53 - General Equilibrium and Disequilibrium: Financial Markets, and D81 - Criteria for Decision-Making under Risk and Uncertainty