Risk and Insurance in Village India

Abstract

Risk and the presence or absence of risk reduction mechanisms at the village and regional level condition opportunities for policy reform. A question, somewhat prior to the policy reform question, is thus clearly posed: how good or how bad are the existing institutions. In villages in southern India important risks are erratic rainfall, crop and human diseases, and severe income fluctuations. Previous research, by studying only one market or institution, may have neglected smoothing possibilities between markets or institutions. A general equilibrium framework is developed to overcome this problem, assessing risk-sharing markets or institutions in a more unified context. Using household data from three villages in southern India, a significant comovement in consumptions suggest that local financial markets there are good, if not perfect, but several anomalies exist, including the low impact of income on consumption and the effect of time varying characteristics such as land holdings on consumption. An explicit private information model could be consistent with the extent of comovement in consumptions while delivering some of these anomalies.

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