Risk and Return in Village Economies

Journal Article
Published on 1 February 2018

Abstract

This paper by Samphantharak and Townsend (2018), published in the American Economic Journal: Microeconomics, provides a theory-based empirical framework for understanding the risk and return on productive capital assets and their allocation across activities in an economy characterized by idiosyncratic and aggregate risk and thin formal markets for real and financial assets. They apply their framework to households running business enterprises in Thai villages with extensive networks, taking advantage of panel data: income, assets, consumption, gifts, and loans. They decompose risk and estimate the risk premia faced by households, distinguishing aggregate risk from idiosyncratic, potentially diversifiable risk. This distinction matters for estimating measures of underlying productivity and has important policy implications. [Publication_Version:_https://www.aeaweb.org/articles?id=10.1257/mic.20160125]

Authors

Krislert Samphantharak

University of California, San Diego

Robert M. Townsend

Massachusetts Institute of Technology