Natural disaster and risk-sharing behavior: Evidence from rural Bangladesh
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Natural disaster and risk-sharing behavior: Evidence from rural Bangladesh Asadul Islam1 · C. Matthew Leister2 · Minhaj Mahmud3 · Paul A. Raschky4 Accepted: 26 September 2020 / Published online: 12 November 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Using a unique field experiment in rural Bangladesh, this paper investigates how exposure to a natural disaster affects risk-sharing behavior. We conducted a risksharing experiment that randomly assigned different levels of risk-sharing commitments to individuals who were exposed and unexposed to a recent natural disaster and asked them to form risk-sharing groups. Our results show that disaster-affected individuals are less likely to defect from risk-sharing groups, regardless of the level of ex-ante commitment. Interestingly, individuals from disaster-affected villages chose riskier bets and realized higher average returns compared with individuals from nondisaster-affected areas. Our results have important implications for the design of financial risk-transfer mechanisms in developing countries. Keywords Risk preference · Risk-sharing · Intrinsic motivation · Asymmetric information · Natural disaster · Field experiment JEL Classification C90 · C93 · D03 · D71 · D81 · O12 · Q54
1 Introduction The vast majority of households in developing countries have no access to formal types of insurance. Therefore more informal types of risk-sharing are often the only methods to insure against consumption shocks (Townsend 1994; Holzmann et al. 2000). There is a substantial amount of literature that documents the use of informal
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11166-020-09334-5) contains supplementary material, which is available to authorized users. Paul A. Raschky
[email protected]
Extended author information available on the last page of the article.
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Journal of Risk and Uncertainty (2020) 61: 67–99
risk-sharing networks to counter the adverse income effects associated with sickness and unemployment (Ravallion and Dearden 1988; Fafchamps and Lund 2003), weather shocks (Morduch 1991), and natural disasters (Freeman and Kunreuther 2002; Zylberberg and Gr¨oger 2016). Considering that informal risk-sharing networks do not rely on formal contracts, an interesting question is whether commitment to informal risk-sharing is stable over time and, in particular, if individual risk-sharing behaviour is affected by exposure to large negative shocks, such as natural disasters or violent conflict. This question is important for various reasons. Informal mechanisms are often insufficient to cover the damages from large negative shocks because the individual risks are often highly correlated, resulting in very large cumulative damages. In addition, large negative shocks could potentially distort or fully eradicate the only available mechanism that allows households to smooth consumption in poor societies. Eventually, this might have longer lasting adverse effects on the individ
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