Risk, Private Information, and the Family

Abstract

In the last fifteen years, our understanding of the behavior of households in both highand low-income countries has increased significantly. Econometric studies contributing to this body of knowledge, concerned with the determinants of such behavior as labor supply, fertility, health and food consumption, however, have generally taken the structure of the household as exogenously given. While some progress has been made concerning how changes in the legal structure alter patterns of family formation and breakup, the wide variety of family organizations observed across countries of the world or the evolution of family structure within countries cannot be readily explained by existing models. While some economists have suggested that organizations based on kinship can be understood in terms of transaction economies (Yoram Ben-Porath, 1980; Robert Pollak, 1985), there are now few precise implications of this approach, and little or no evidence of its usefulness for predicting or explaining the existence of any particular family structure in specific settings characterized by their natural endowments and/or legal structure. In this paper I discuss some recent studies of family and household organization in one specific context, rural India, that have sought to formulate a model of household structure based on the need for individuals in lowincome, private information settings to protect themselves against intertemporal fluctuations in resources arising from the natural vagaries of water supply. I also present some new evidence on the relationship between family arrangements and measured risk characteristics of the agricultural environment in these settings. While many economists have highlighted risk and information consideration in the study of such formal rural institutions as sharecropping, permanent servitude, and contractual interlinking, studies of these individual contractural arrangements have ignored the family itself as a risk-mitigating institution. Moreover, much of this literature has been solely concerned with ex ante measures to reduce risk-contractual instruments or production factors that reduce the effects of variability in the exogenous production input rainfall on income. Mechanisms serving to preserve consumption stability ex post in the face of variability in realized income have been neglected.

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