Risk-Sharing Networks among Households in Rural Ethiopia

This empirical study attempts to understand the importance of informal risk-sharing networks in villages that usually take effect in the event of shocks such as natural calamities. It discusses the various studies to date in this connection, and describes contextually the statistical model (the limited commitment model) that the author uses.

The paper identifies the informal networks in rural Ethiopia as follows:

• Rotating savings and credit association (e.g. iqqub);
• Mutual aid associations (iddir);
• Local moneylenders;
• Labor and oxen sharing arrangements,
• Sharecropping arrangements and ethnic ties.

It then identifies the extent to which these informal networks contribute to risk-pooling in rural Ethiopia when adversity strikes, through primary research in 15 villages of Ethiopia.

The paper is presented in the following format:

• Theoretical framework of analysis;
• Estimating equation to calculate the impact of networks on risk-sharing among households in the face of income shocks;
• Presentation of data and descriptive statistics;
• Empirical results;
• Findings.

The paper concludes that:

• Full risk sharing does not appear to take place even among networks;
• The networks work better for farm households with more land than for relatively poorer households;
• Policy is required to provide risk pooling opportunities for the poor as the networks are not substantial for full risk sharing.