Abstract
Abstract This paper uses a dataset from Tanzania with information on consumption, income, and income shocks within and across family networks. Crucially and uniquely, it also contains data on the degree of information existing between each pair of households within family networks. We use these data to construct a novel measure of the quality of information both at the level of household pairs and at the level of the network. We also note that the individual level measures can be interpreted as measures of network centrality. We study risk sharing within these networks and explore whether the rejection of perfect risk sharing that we observe can be related to our measures of information quality. We show that households within family networks with better information are less vulnerable to idiosyncratic shocks. Furthermore, we show that more central households within networks are less vulnerable to idiosyncratic shocks. These results have important implications for the characterisation of the empirical failure of the perfect risk-sharing hypothesis and point to the importance of information frictions.
Highlights
In many developing countries, risk is very pervasive
When we look at the way in which information quality interacts with risk sharing, by and large, we find that the better the quality of information in a family network, the closer the allocations in that network are to those that would occur under perfect risk sharing
We have studied the relationship between risk sharing within family networks and the quality of the information within these networks
Summary
The lack of economic development implies that individuals have access to a much lower level of resources and that life is much riskier. Substantial shocks to resources, when one’s living standards are close to subsistence levels, can have important and dramatic consequences. The presence of risk is salient in rural contexts, where. The editor in charge of this paper was Imran Rasul
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