Abstract
This paper measures the economic impact of social pressure to share income with kin and neighbors in rural Kenyan villages. The authors conduct a lab experiment in which they randomly vary the observability of investment returns. The goal is to test whether subjects reduce their income in order to keep it hidden. The analysis finds that women adopt an investment strategy that conceals the size of their initial endowment in the experiment, although that strategy reduces their expected earnings. This effect is largest among women with relatives attending the experiment. Parameter estimates suggest that women behave as though they expect to be pressured to share four percent of their observable income with others, and substantially more when close kin can observe income directly. Although this paper provides experimental evidence from a single African country, observational studies suggest that similar pressure from kin may be prevalent in many rural areas throughout Sub-Saharan Africa.
Highlights
Risk is a pervasive aspect of the lives of individuals in many developing economies, and informal risk-pooling arrangements which help households cope with shocks can have substantial welfare impacts when credit and insurance markets are incomplete
Much of the literature focuses on mutual insurance arrangements which are efficient given constraints, characterizing the conditions under which self-interested households will enter risk-pooling schemes voluntarily ex ante and the participation constraints which keep households from defecting ex post
We report the results of an experiment designed to measure social pressure to share income with relatives and neighbors in rural villages in Sub-Saharan Africa
Summary
Risk is a pervasive aspect of the lives of individuals in many developing economies, and informal risk-pooling arrangements which help households cope with shocks can have substantial welfare impacts when credit and insurance markets are incomplete. Consistent with a simple model of decisions in the experiment when subjects face pressure to share income and risk preferences are heterogeneous, we find that women receiving the large endowment are more likely to invest exactly the amount of the small endowment when investment returns are observable, and that this tendency is more pronounced among women with relatives present. After presenting our reduced form results, we estimate the magnitude of the “kin tax” parameter via maximum simulated likelihood in a mixed logit framework In our setting, this extension is important because the size of the treatment effect of observability depends on individual risk preferences. (2008); Choi, Kariv, Muller, and Silverman (2011), and Von Gaudecker, van Soest, and Wengstrom (2011) for further experimental evidence on risk preference heterogeneity
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