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RISK SHARING WITH LIMITED COMMITMENT AND PREFERENCE HETEROGENEITY: STRUCTURAL ESTIMATION AND TESTING

Laczo, S (2015) RISK SHARING WITH LIMITED COMMITMENT AND PREFERENCE HETEROGENEITY: STRUCTURAL ESTIMATION AND TESTING Journal of the European Economic Association, 13 (2). pp. 265-292.

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Abstract

In order to analyze the role of limited commitment and preference heterogeneity in explaining the consumption allocation, I propose a theoretical and empirical framework to estimate and evaluate a risk-sharing model where insurance transfers have to be self-enforcing and the coefficient of relative risk aversion may depend on observable household characteristics. I compare this model to benchmark models with full commitment and/or without preference heterogeneity using data from three Indian villages. I find that the limited commitment model with heterogeneous preferences outperforms the benchmark models in a statistical sense and in terms of (i) explaining the dynamic response of consumption to idiosyncratic income shocks, (ii) accounting for the variation of consumption unexplained by household and time effects, and (iii) capturing the variation of inequality across time and villages and predicting changes in inequality. I also use the estimated models to predict the effects of a counterfactual tax and transfer policy on the consumption allocation. The limited commitment model with preference heterogeneity predicts larger benefits to the poor than its homogeneous counterpart.

Item Type: Article
Subjects : Economics
Divisions : Faculty of Arts and Social Sciences > School of Economics
Authors :
AuthorsEmailORCID
Laczo, SUNSPECIFIEDUNSPECIFIED
Date : 1 April 2015
Identification Number : 10.1111/jeea.12115
Copyright Disclaimer : The definitive version is available at http://onlinelibrary.wiley.com/doi/10.1111/jeea.12115/full
Additional Information : The definitive version is available at http://onlinelibrary.wiley.com/doi/10.1111/jeea.12115/full
Depositing User : Symplectic Elements
Date Deposited : 18 Feb 2016 13:20
Last Modified : 31 Oct 2016 02:08
URI: http://epubs.surrey.ac.uk/id/eprint/809819

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