Idiosyncratic Shocks and Efficient Risk Sharing: An Investigation of Rural Malawi
journal contributionposted on 05.06.2017 by Tsafack, Esther, Maitra, Pushkar
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The aim of this paper is to investigate the ability of households in rural Malawi in insuring consumption against idiosyncratic income shocks. We examine the role of alternative instruments that enable households in insuring consumption. Our estimation results show that gifts (and more generally transfers within the family) and borrowing do not appear to be playing a significant role in insuring households against idiosyncratic income shocks. However purchases and sales of assets appear to be playing an important role. Households that face idiosyncratic income shock reduce their asset holding. We also find that households in rural Malawi are particularly vulnerable against demographic shocks: in particular there is a significant labour market effect for households that face demographic shocks. Our results have significant policy implications. Insurance through assets variation (the most common instrument used) is only effective in the short run and in the medium and long run this insurance mechanism could actually lead to a poverty trap. Our results imply that there is an urgent need for the government to implement coping strategies/policies that depend less on asset holdings.