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We present a framework for the study of risk and return of household enterprise in developing economies. We make predictions from two polar benchmarks: (1) an economy with Pareto optimal allocations under full risk sharing, and (2) an economy in which each autarky household absorbs risk in isolation. The full risk-sharing benchmark delivers the prediction that only aggregate covariate risk contributes to the risk premium of asset returns while idiosyncratic risk is fully diversified, consistent with analogous results derived from the Capital Asset Pricing Model (CAPM) in the finance literature. The economy with autarky households predicts that overall fluctuation at the household level is the only concern. Our framework allows us to empirically decompose the total risk in production technologies operated by households into aggregate and idiosyncratic components and provides us with a practical procedure to compute risk premium for each component separately. We apply the framework to monthly panel data from a household survey in rural Thailand where there are active risk-sharing and kinship networks. We find that there is nontrivial aggregate risk and there is a positive relationship between the expected returns on assets and the comovement of asset returns with the aggregate returns, as predicted by the full risk-sharing economy. There is residual idiosyncratic risk and it also contributes to the total risk premium, as predicted by the autarky benchmark. However, although idiosyncratic risk is the dominant factor in total risk, our study shows that it accounts for a much smaller share of total risk premium. Exposure to aggregate and idiosyncratic risk is heterogeneous across households as are the corresponding risk-adjusted returns, with important implications for vulnerability and productivity.

Zonder onderwerpscode: economie

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Zonder onderwerpscode: economie

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Housekeeping

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Zonder onderwerpscode: economie

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We measure heterogeneity in risk aversion among households in Thai villages using a full risk-sharing model and complement the results with a measure based on optimal portfolio choice. Among households with relatives living in the same village, full insurance cannot be rejected, suggesting that relatives provide something close to a complete-markets consumption allocation. There is substantial heterogeneity in risk preferences estimated from the full-insurance model, positively correlated in most villages with portfolio-choice estimates. The heterogeneity matters for policy: Although the average household would benefit from eliminating village-level risk, less-risk-averse households who are paid to absorb that risk would be worse off.

Zonder onderwerpscode: economie