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.
- D81 - Criteria for Decision-Making under Risk and Uncertainty
- O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- D14 - Household Saving; Personal Finance
- G11 - Portfolio Choice; Investment Decisions
- D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- D12 - Consumer Economics: Empirical Analysis
- D53 - General Equilibrium and Disequilibrium: Financial Markets
- Federal Reserve Bank of Minneapolis. Research Department
- Federal Reserve Bank of Minneapolis
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