Scandinavian Working Papers in Economics
Working Papers,
Lund University, Department of Economics
No 2024:7: Risk-Sharing and Land Misallocation
Davide Pietrobon () and Alessandro Ruggieri ()
Additional contact information
Davide Pietrobon: Department of Economics, Lund University, Postal: School of Economics and Management, Box 7080, S-220 07 Lund, Sweden
Alessandro Ruggieri: CUNEF Universidad, Postal: Calle Leonardo Prieto Castro 2, Madrid, Spain
Abstract: We study the impact of incomplete consumption risk-sharing on land misallocation in rural economies. We develop a general equilibrium model of land cultivation choices, where heterogeneous agricultural households face idiosyncratic output shocks and insure themselves by participating in a risk-sharing arrangement. Incomplete insurance distorts households’ choices, leading them away from maximizing expected incomes and resulting in land misallocation. Using the latest ICRISAT panel data from rural India, we quantify the losses attributable to limited risk-sharing. Completing insurance markets leads to output and welfare gains of 19% and 29%, respectively. Improving the functioning of consumption insurance markets within an otherwise undistorted economy can yield gains comparable to those achieved by removing distortions in factor markets.
Keywords: Misallocation; risk-sharing; agriculture; productivity; welfare
Language: English
46 pages, September 18, 2024
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