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- Title
FORMAL AND INFORMAL RISK SHARING IN LDCs: THEORY AND EMPIRICAL EVIDENCE.
- Authors
Dubois, Pierre; Jullien, Bruno; Magnac, Thierry
- Abstract
We develop and estimate a model of dynamic interactions in which commitment is limited and contracts are incomplete to explain the patterns of income and consumption growth in village economies of less developed countries. Households can insure each other through both formal contracts and informal agreements, that is, selfenforcing agreements specifying voluntary transfers. This theoretical setting nests the case of complete markets and the case where only informal agreements are available. We derive a system of nonlinear equations for income and consumption growth. A key prediction of our model is that both variables are affected by lagged consumption as a consequence of the interplay of formal and informal contracting possibilities. In a semiparametric setting, we prove identification, derive testable restrictions, and estimate the model with the use of data from Pakistani villages. Empirical results are consistent with the economic arguments. Incentive constraints due to self-enforcement bind with positive probability and formal contracts are used to reduce this probability.
- Subjects
ECONOMIC forecasting; CONSUMPTION (Economics); MATHEMATICAL models of economic forecasting; MATHEMATICAL models of income; REGIONAL disparities in income; INCOME forecasting; ECONOMIC history
- Publication
Econometrica, 2008, Vol 76, Issue 4, p679
- ISSN
0012-9682
- Publication type
Article
- DOI
10.1111/j.1468-0262.2008.00857.x