This paper investigates whether agricultural households in rural Philippines insure their consumption and use remittances, informal loans or assets as ex post risk-coping mechanisms. Since these households have limited access to formal insurance and credit markets, any shocks to their volatile income can have substantial impacts. Using panel data and rainfall shocks as the instrumental variable for income shocks, this paper finds evidence that households depend on their networks of family and friends to partially insure their consumption. The analysis shows that approximately 27 percent of consumption is insured. International remittances from migrant members replace about 11 percent of income decline while domestic transfers replace about 14 percent. Informal loans, however, decrease as rainfall shocks increase. Borrowers and lenders may be experiencing similar shocks, which would reduce the effectiveness of local risk-sharing arrangements.
BardhanPUdryC (1999) Development Microeconomics, Oxford, UK: Oxford University Press.
3.
Clarke G and Wallsten S (2003) Do Remittances Act Like Insurance? Evidence From a Natural Disaster in Jamaica. World Bank Working Paper. Mimeo. Washington, DC: Development Research Group, The World Bank.
4.
CochraneJ (1991) A simple test of consumption insurance. Journal of Political Economy99(5): 957–976.
5.
DeatonA (1992) Understanding Consumption, Oxford, UK: Oxford University Press.
6.
Dubois P and Ligon E (2005) Incentives and Nutrition for Rotten Kids: Intrahousehold Food Allocation in the Philippines. Working Paper. Department of Agricultural and Resource Economics, University of California, Berkeley. Available at: http://are.berkeley.edu/∼ligon/Papers/rottenkid.pdf.
7.
FafchampsMLundS (2003) Risk-sharing networks in rural Philippines. Journal of Development Economics71(2): 261–287.
8.
LucasRStarkO (1985) Motivations to remit: Evidence from Botswana. Journal of Political Economy93(5): 901–918.
9.
MaceB (1991) Full insurance in the presence of aggregate uncertainty. Journal of Political Economy99(5): 928–956.
PlatteauJ-PAbrahamA (1987) An inquiry into quasi-credit contracts: The role of reciprocal credit and interlinked deals in small-scale fishing communities. Journal of Development Studies23(4): 461–490.
15.
RavallionMChaudhuriS (1997) Risk and insurance in Village India: Comment. Econometrica65(1): 171–184.
16.
RosenzweigMWolpinK (1993) Credit market constraints, consumption smoothing and the accumulation of durable production assets in low-income countries: Investments in bullocks in India. Journal of Political Economy101(2): 223–244.
17.
StaigerDStockJ (1997) Instrumental variables regression with weak instruments. Econometrica65(3): 557–586.
18.
Stock J and Yogo M (2002) Testing for Weak Instruments in Linear IV Regression. Technical Working Paper No. 284. Cambridge, MA: National Bureau of Economic Research. Available at: http://www.nber.org/papers/t0284.pdf.
