Informal Insurance and the Extent of the Market

University Of California-Berkeley, Berkeley CA

Investigators

Abstract

ABSTRACT PROPOSAL NO: 0339177 INSTITUTION: University of California, Berkeley NSF PROGRAM: ENHANCING HUMAN PERFORMANCE PI: Ligon, Ethan TITLE: Informal Insurance and the Extent of the Market This research extends dynamic models of limited commitment to account for observed limitations in (possibly informal) risk-sharing arrangements in both rural and urban China. It will make four major contributions to economists' understanding of how households perform in the face of shocks: 1) how well markets for credit and insurance have helped Chinese households deal with the shocks associated with transition to a market economy over the period 1987-2001, and how existing mechanisms for insurance provision have encouraged greater specialization in production. 2) Extension of dynamic models with limited commitment to allow any finite number of heterogeneous households to make non-trivial household-level decisions over investment and production technology. 3) The research will employ extensive household panel data to measure the risk faced by Chinese households, conditional on whatever formal or informal mechanisms may exist for mitigating these risks, thus permitting a richer understanding of the variation over both time and space in household welfare. 4) This project will construct and test models capable of explaining variation in the extent of risk-sharing across both time and space, so that we can learn something about what features of the environment are necessary to generate the observed patterns of spatial risk-sharing. These theoretical extensions are substantial improvements over currently existing models of dynamic models with limited commitment. The data to be used for this project is unique and will allow the PI to answer several questions. Making the data available to other researcher will aid in understanding, not only the Chinese economy, but Chinese society at large. This research will have several impacts beyond advances in economic science. The development of the methods for measuring household risk and vulnerability is of interest to analysts interested in welfare measurements which take into account the risk faced by households; this is of particular importance in understanding how households cope with the kinds of shocks associated with economic transition. Second, Chinese entry into the World Trade Organization will have differential effects on households in different regions and in different sectors of the economy; measurement of household vulnerability can provide useful estimates of heterogeneous impacts on different kinds of households. This project will train researchers at Peking University and the National Bureau of Statistics in the theoretical and empirical tools pertinent to these kinds of welfare measurements. Finally, a clearer understanding of the limits on informal mechanisms for credit and insurance is of practical importance to NGOs and policymakers interested in developing mechanisms (e.g., microcredit) to needy households.