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Risk Preferences in Households and Families

Tuesday, February 6, 2007 - 12:00pm to 1:30pm

Center for Global Development presents a brown bag seminar on
Risk Preferences in Households and Families

Amar Hamoudi
University of California at Los Angeles 

Amar is a Ph.D. candidate at University of California at Los Angeles

Tuesday, February 6, 2007
12:00 p.m. – 1:30 p.m.
Center for Global Development
1800 Massachusetts Avenue, NW, Third Floor, Washington, D.C.


In many microeconomic applications and program evaluations, the household is the unit of observation. However, the economic characteristics on which individuals are selected into coresidence remain poorly understood. This paper investigates whether and how adults are selected into coresidence on a specific aspect of preferences—viz., risk aversion. Drawing on new data from studies fielded on population-representative samples in rural Mexico, I find that coresident household members have similar willingness to take financial risk. This within-household similarity reflects resemblance within the broader extended family, but I demonstrate that it is also affected by preference-specific selection in the family’s living arrangements. My analysis explicitly relates the observed pattern of selection to existing models of informal intrafamily risk sharing. Specifically, I find that adult children who are less risk averse are more likely to be selected into coresidence with their parents than their more risk averse siblings. This may be because spatial separation between more risk averse family members is a more effective strategy for diversifying weather-related agricultural risk, since more risk averse individuals are able to make a broader range of credible commitments in informal self-enforcing risk sharing arrangements. These findings have important implications about economic welfare. The family resemblance in economic preferences which I report may be a source of within-family correlations in economic outcomes. Furthermore, the dynamics of risk-preference-specific selection into coresidence reflects the important sense in which living arrangements themselves can be understood as a form of economic exchange among family members.

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