Heterogeneity and Risk Sharing in Thai Villages

We use two distinct methods, drawn from the theories of efficient risk sharing and optimal portfolio choice, to measure heterogeneity in risk aversion among households in Thailand. Our dataset is an unusually long monthly panel that includes information on kinship networks. We demonstrate that among households who have relatives living in the same village, the hypothesis of full insurance cannot be rejected, suggesting that gifts and insurance transfers among relatives provide something close to a complete-markets consumption allocation. We then show that there is substantial heterogeneity in risk preferences according to both of our methods. Estimates from the two methods are positively correlated in most villages. However, we find little relationship between preferences and household wealth or demographic variables. In a computational experiment, we show that the heterogeneity in preferences matters for policy: Although the average household would benefit from eliminating aggregate village-level risk, some relatively risk-tolerant households would experience substantial welfare losses if aggregate risk were eliminated. ∗Chiappori: Columbia University; [email protected]. Samphantharak: University of California, San Diego; [email protected]. Schulhofer-Wohl: Federal Reserve Bank of Minneapolis; [email protected]. Townsend: Massachusetts Institute of Technology; [email protected]. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.