Credit Markets, Risk Pooling and Risk Taking in Low-Income Countries (original) (raw)
Related papers
Risk, Implicit Contracts and the Family in Rural Areas of Low-Income Countries
The Economic Journal, 1988
In this paper the role of family structure in mitigating income volatility in the absence of income insurance in low-income agricultural environments is discussed. Hypotheses concerning the relationship between the membership, size and composition of households and insurance-based income transfers are tested using longitudinal data from India. A test is also performed of whether a household's ability to reduce risk ex post via family arrangements affects its willingness tobear risk ex ante through its selection of formal tenancy contracts. The results support these hypotheses concerning the risk-mitigating roles of both household structure and share contracts, and indicate as well the importance of heterogeneity in risk-aversion across households. In recent years our understanding of rural institutions in low-income settings has been increased substantially by the application of modern microanalytic models and methods to such environments. Two strands of literature have emerged. One has focused on the econometric modeling of household "institutions" as the loci of economic activities, in the theoretical tradition of Chayanov (1925). This literature (e.g., Lau, Lin and Yotopoulos (1978), Barnum and Squire (1978) and Rosenzweig (1980), summarized in Singh et al. (1986)), has employed static, utility-maximizing models of households simultaneously engaged in production and consumption decisions to provide rigorous (i.e., theoretically-grounded) and informative econometric analyses of the interplay between food prices, wage rates, agicultural profits, food consumption and labor supply. A second, contemporaneous literature highlights two other important aspects of low-income rural environments, their riskiness and the absence of, or limitations on, insurance and other intertemporal markets. These environmental characteristics and the assumption of risk-averse agents are shown to account for the existence of such important formal rural institutions as share tenancy and permanent servant contracts as well as contractual interlinking. All of these institutions are viewed at least in part as ex ante means of reducing the riskiness of agricultural production for rural agents. These two parallel approaches are characterized by complementary shortcomings. The household enterprise literature ignores market problems, indeed explicitly assuming the existence of all markets and full information, and thus is silent on intertemporal aspects of consumption and production under risk. Moreover, the approach takes for granted rather than explains the structure of households-their size and membership. The studies concerned with contractual forms, on the other hand, have seen little empirical application or testing, in
Income Risk, Coping Strategies, and Safety Nets
World Bank Research Observer, 2002
Rural and urban households in developing countries face substantial idiosyncratic and common risk, resulting in high income variability. Households in risky environments have developed sophisticated (ex-ante) risk-management and (ex-post) risk-coping strategies, including self-insurance via savings and informal insurance mechanisms to do so while formal credit and insurance markets appear to contribute only little to reducing income risk and its consequences. Informal credit and insurance, however incomplete, helps to cope with risky incomes. Despite these strategies, vulnerability remains high, and is reflected in fluctuations in consumption. It is clear therefore, that further development of safety nets will be necessary. In this paper, we focus on the opportunities available to households to use risk-management and risk-coping strategies, and on the constraints on their effectiveness.
Evidence of risk sharing and the role of transfers and loans : the case of rural Pkistan
Manuscript, 1994
Risk-sharing is a fundamental form of economic behaviour. It can occur through formal insurance markets, informal family arrangements, community support, legal institutions (such as bankruptcy), or government tax-transfer programmes. Whatever the mechanism used to share risk, the extent of risk mitigation can greatly influence the welfare of all members of society. Understanding the degree of risk-pooling in society is important for policy-makers, since insufficient risk pooling may provide a basis for government intervention. Alternatively, if risks are being pooled adequately without the help of the government, government risk-sharing may be redundant. This study explores the implications of the risk-sharing model, namely, that households which pool risks, either through formal markets or informal personal arrangements, experience correlated changes in their consumption through time. It conducts tests of within-village, across-village, within-district, and across-district risksharing using a new Pakistani panel data set-the Pakistan Food Security Management Survey-collected by the International Food Policy Research Institute (IFPRI), Washington, D. C. Unlike studies for other Less Developed Countries (LDCs), these tests find very little or almost no evidence of risk-sharing among unrelated individuals within-and across-villages in the rural sector of Pakistan.
Household Financial Assets in the Process of Development
2008
Systematic information on household financial asset holdings in developing countries is very sparse; we review some available data and current policy debates. Although financial asset holdings by households are highly concentrated, deeper financial systems are correlated with improved income distribution. For low-income countries, the relevant question for poor households is not how much financial assets they have, but whether they have any access to financial products at all. Building on and synthesizing disparate data collection efforts by others, we produce new estimates of access percentages for over 150 countries. Across countries, access is negatively correlated with poverty rates, but the correlation is not a robust one: thus the supposed anti-poverty potential of financial access remains econometrically elusive. Despite policy focus on the value of credit instruments, it is deposit products that tend to be the first to be used as prosperity increases, before more sophisticated savings products and borrowing.
Risk-sharing networks in rural Philippines
Journal of Development Economics, 2003
Using detailed data on gifts, loans, and asset sales, this paper investigates how rural Filipino households deal with income and expenditure shocks. We find that shocks have a strong effect on gifts and informal loans, but little effect on sales of livestock and grain.
A Dark Side of Social Capital? Kinship, Consumption, and Savings
Journal of Development Studies, 2011
Forthcoming on the Journal of Development Studies ABSTRACT We explore if traditional sharing norms in kinship networks affect consumption and accumulation decisions of poor black households in Kwazulu-Natal, South Africa. Using a proxy for the number of family dependents, our results are consistent with the interpretation that households try to evade their 'sharing obligations' by (i) accumulating durables that are nonsharable at the expense of durables that may be shared, and (ii) reducing savings in liquid assets. By attenuating accumulation incentives, kinship sharing may come at the expense of income growth-if so, a culturally-induced poverty trap can possibly eventuate. We demonstrate tentative evidence that more extensive kinship networks are associated with lower incomes.
RePEc: Research Papers in Economics, 2004
This paper uses PSID data for 1989, 1994, and 1999 to examine why some U.S. households are asset poor, i.e., why households have insufficient resources to invest or to sustain household members at a basic level during times of economic disruption. The study contributes to an improved understanding of asset poverty's correlates by examining the influence of place of residence; the extant literature has focused on individual-level explanations. We estimate a random-effects logistic model of the probability that an individual is asset poor at a given point in time as a function of household (e.g., gender and race of the head, family structure) and place (region and metropolitan or nonmetropolitan county) variables. The central finding of the paper is that place of residence is an important determinant of asset poverty, above and beyond the influence of household characteristics. We find that living in a central metropolitan county and in a nonmetropolitan area is associated with a higher risk of being asset poor, all else being equal.