Limited Commitment and Crowding out of Private Transfers: Evidence from a Randomised Experiment

This paper studies some empirical implications of models with limited risk sharing due to the imperfect enforceability of contracts. We test whether the amount by which public transfers reduce private transfers is affected by features of the economy, such as the variance of income and its persistence. These implications are unique to models with imperfect enforceability. We use data from Mexico collected to evaluate a public transfer programme. It included a randomised component that we exploit as a source of exogenous variation. Our results support the theoretical model in that the crowding out of private transfers is larger in villages where the variance of income is smaller. Copyright Royal Economic Society 2003