Self-Production, Friction, and Risk Sharing against Disasters: Evidence from a Developing Country

This paper uses a unique household data set collected in Vietnam to empirically test the necessary conditions for an extended version of the consumption risk-sharing hypothesis. The test explicitly incorporates self-production and uses natural disasters such as avian influenza, droughts, and floods to identify the effectiveness of market and non-market risk-sharing mechanisms. With these additional treatments, full risk sharing within each commune cannot be rejected, which suggests the presence of omitted variable and endogeneity biases in existing studies that reject full risk sharing. We also find that credit constraints have a significant impact, although limited commitment is not necessarily serious.