Risk Sharing Arrangements and the Structure of Risk and Time Preference: Theory and Evidence from Village India

This paper investigates the extent to which rural households in developing countries are able to smooth consumption. A basic model of full-information intra-village risk sharing adopted by Townsend (1994) is extended to the case where participating households have different risk and time preferences. A resulting rule of risk allocation is characterized in an intuitive way, clarifying the effects of diverse preferences. Empirical models are applied to the ICRISAT household panel data collected from rural India to test full insurance and to investigate the structure of risk and time preferences. Estimation results strongly support the heterogeneity of risk preferences and their distribution is cosistent with households' social positions in the village. In contrast, only a weak evidence is found for the hypothesis of heterogeneous time preferences.