Abstract

http://ssrn.com/abstract=997115
 
 

References (51)



 
 

Citations (12)



 


 



Formal and Informal Risk Sharing in LDCs: Theory and Empirical Evidence


Pierre Dubois


University of Toulouse 1 - Toulouse School of Economics (TSE)

Bruno Jullien


University of Toulouse 1 - Toulouse School of Economics (TSE); University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Thierry Magnac


Toulouse School of Economics; University of Toulouse 1 - Industrial Economic Institute (IDEI); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR)

January 2007

CEPR Discussion Paper No. 6060

Abstract:     
We develop and estimate a model of dynamic interactions where 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 through both formal contracts and informal agreements, that is, agreements specifying voluntary transfers that need to be self-enforceable. This theoretical setting nests the case of complete markets and the case where only informal agreements are available. We derive a system of non-linear 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 semi-parametric setting, we prove identification, derive testable restrictions and estimate the model with the use of data from Pakistan 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.

Number of Pages in PDF File: 49

Keywords: Contracts, Incomplete Markets, Informal Transfers, Risk sharing

JEL Classification: C14, D13, D91, L14, O12

working papers series


Date posted: June 28, 2007  

Suggested Citation

Dubois, Pierre and Jullien, Bruno and Magnac, Thierry, Formal and Informal Risk Sharing in LDCs: Theory and Empirical Evidence (January 2007). CEPR Discussion Paper No. 6060. Available at SSRN: http://ssrn.com/abstract=997115

Contact Information

Pierre Dubois (Contact Author)
University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )
Place Anatole-France
Toulouse Cedex, F-31042
France
Bruno Jullien
University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )
Place Anatole-France
Toulouse Cedex, F-31042
France
University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ) ( email )
Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France
+33 5 6112 8561 (Phone)
+33 5 6122 8637 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Thierry Magnac
Toulouse School of Economics ( email )
Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France
University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )
Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
Institute for the Study of Labor (IZA) ( email )
P.O. Box 7240
Bonn, D-53072
Germany
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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References:  51
Citations:  12

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