Creator: Ligon, Ethan, Thomas, Jonathan P., and Worrall, Tim Series: Endogenous incompleteness Abstract:
This paper studies efficient insurance arrangements in village economies when there is complete information but limited commitment. Commitment is limited because only limited penalties can be imposed on households which renege on their promises. Any efficient insurance arrangement must therefore take into account the fact that households will renege if the benefits from doing so outweigh the costs. We study a general model which admits aggregate and idiosyncratic risk as well as serial correlation of incomes. It is shown that in the case of two households and no storage the efficient insurance arrangement is characterized by a simple updating rule. An example illustrates the similarity of the efficient arrangement to a simple debt contract with occasional debt forgiveness. The model is then extended to multiple households and a simple storage technology. We use data from the ICRISAT survey of three villages in southern India to test the theory against three alternative models: autarky, full insurance, and a static model of limited commitment due to Coate and Ravallion (1993). Overall, the model we develop does a significantly better job of explaining the data than does any of these alternatives.
关键词: Risk, Limited commitment, Agrarian economies, Insurance arrangements, Village economies, and India 学科: O12 - Economic development - Microeconomic analyses of economic development, D81 - Information, knowledge, and uncertainty - Criteria for decision-making under risk and uncertainty, and O15 - Economic development - Human resources ; Human development ; Income distribution ; Migration