Risk Insurance in a Transition Economy: Evidence from Rural Romania

35 Pages Posted: 26 Oct 2010

Multiple version iconThere are 4 versions of this paper

Date Written: August 1, 2006

Abstract

We test the hypothesis of Pareto optimal risk-sharing in a transition economy using a new dataset on a representative sample of 364 rural households from Romania. We identify income shocks as instances of adverse weather, crop and animal diseases, as well as illness and unemployment spells. Despite limited participation of Romanian rural households in formal insurance and credit markets, we fail to reject the hypothesis of full insurance of total non-durable consumption and its components. Survey responses indicate that the main channels of consumption smoothing are self-insurance (for adverse weather, crop and animal diseases), public transfers (for unemployment spells), and to a lesser extent, family ties. We find that adverse weather is associated with higher growth rates of non-food expenditures. Furthermore, richer households are better able to cope with crop failure than poorer households. An alternative explanation to our not rejecting the hypothesis of full insurance is that some shocks to consumption (e.g., illness) play the role of preference shifters of the utility function.

Keywords: Risk, Insurance, Consumption Smoothing, Transition Economies

JEL Classification: O12, O5, P2

Suggested Citation

Irac, Delphine and Minoiu, Camelia, Risk Insurance in a Transition Economy: Evidence from Rural Romania (August 1, 2006). Banque de France Working Paper No. NER-E 154. Available at SSRN: https://ssrn.com/abstract=1697649 or http://dx.doi.org/10.2139/ssrn.1697649

Delphine Irac (Contact Author)

Banque de France ( email )

Paris
France

Camelia Minoiu

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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