Does Inequality Impede Risk Management? Evidence from a Lab-in-the-Field Experiment in Ghana

• Development Workshop

Date and Location

Tuesday, December 7, 2021, 4:10 PM - 5:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

Low income households in agrarian developing economies face considerable livelihood risks, which have
serious negative impacts on household welfare. Incomplete financial markets present an external constraint
on risk management and are well studied in the literature. A growing literature has focused on internal
constraints on development, which can negatively affect saving and investment behavior. Here I propose
that internal constraints may also hinder risk management. Specifically, I present a theoretical model that
explores how fairness preferences may create an internal constraint on risk-sharing, particularly in a context
of wealth inequality. To test this theory, I utilize a lab experiment, conducted in Ghana, to investigate the
impact of wealth inequality on utilization of risk-management tools and explore how fairness preferences may
mediate this effect. I find that inequality reduces risk-sharing and increases demand for insurance. Moreover,
I find evidence that fairness preferences create an internal constraint on risk-sharing under inequality.