Risk Insurance in a Transition Economy: Evidence from Rural Romania

Banque de France Working Paper No. 145

23 Pages Posted: 8 Aug 2006

See all articles by Camelia Minoiu

Camelia Minoiu

Federal Reserve Board

Delphine M. Irac

Columbia University - Graduate School of Arts and Sciences, Department of Economics

Multiple version iconThere are 4 versions of this paper

Date Written: August 4, 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, maternity and nursery), 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

Minoiu, Camelia and Irac, Delphine M., Risk Insurance in a Transition Economy: Evidence from Rural Romania (August 4, 2006). Banque de France Working Paper No. 145. Available at SSRN: https://ssrn.com/abstract=922411 or http://dx.doi.org/10.2139/ssrn.922411

Camelia Minoiu (Contact Author)

Federal Reserve Board ( email )

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

Delphine M. Irac

Columbia University - Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

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