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Citation Information

Type Report
Title Risk Aversion, Household Partition, and Consumption Smoothing in Rural Mexico
Publication (Day/Month/Year) 2010
URL http://dse.univr.it/ssef/documents/material2010/risk_partition_100623figtab.pdf
This paper uses new data on preferences over consumption risk and changes in living arrangements to explore relationships between consumption smoothing and household partitions in rural Mexico. I show that even when adult family members stop living together, they retain important economic ties. They share resources in a manner that allows them to smooth their consumption even if their own income fluctuates. I further show that the event of an adult family member departing the household is itself related to the family’s capacity to share risk; for example, partition tends to represent a diversification of the family’s productive activities. In light of these patterns, I draw on the theoretical literature regarding informal consumption smoothing to show that the risk aversion of family members may affect their ability to share resources. I report relationships between families’ living arrangements and the risk aversion of their members that are consistent with this proposition. Taken together, the empirical patterns I describe highlight the plausibility of a model of informal consumption smoothing among family members, in which living arrangements are among the choice variables. A proposition of such a model could point to a potential cost of incomplete credit and insurance markets, since it would imply that families have incentive to sort their members into productive activities in part on the basis of their consumption preferences, rather than solely on the basis of their comparative advantage in these productive activities.

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