Conference name, dates, place

2007 International Conference on Ethiopian Development Studies (4th ICEDS) A Multidisciplinary Conference on the Challenges of Peace and Development in Ethiopia & the Horn of Africa, held in Kalamazoo, Michigan (WMU), August 2-4, 2007

Document Type

Paper

Presentation Date

8-2007

Abstract

This paper contributes to a growing literature that investigates the mechanisms of risk-sharing among poor households. There are two aspects of the paper that are particularly relevant in the context of the literature. First, it focuses on poor urban areas. The disproportionate focus in the literature on rural households has meant that we know relatively little about the risk-sharing practices of poor urban households. Given that formal insurance is largely absent even in urban areas of most developing economies, it is apparent that these households may be no less vulnerable to income risk than their rural counterparts. Furthermore, because of lack of survey data, the little we know about risk sharing between poor urban households has come from small, targeted surveys. The use of a nationally representative urban survey data in this study is particularly appealing in this regard.1 Second, the study uses information on both private transfer and informal loan activities to assess whether each mechanism serves risk sharing purposes. The simultaneous treatment of both potential instruments sheds light on relative performance, and also highlights idiosyncrasies that affect household participation in either (or both) mechanisms. It has been argued in the literature that if households are motivated by altruism, private transfers in the form of pure gifts are the primary means through which risk-sharing occurs. However, if enforcement problems are pronounced, informal credit with contingent repayment may be used to realize self-enforcing risk-sharing contracts (Fafchamps, 1999). Fafchamps and Lund (2003) argue that such enforcement problems are the reason behind their finding that informal loans (quasi-credit), and not gifts and transfers, perform risk-sharing functions in rural Filipino networks.

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