Health shocks and informal risk sharing: Empirical evidence

Recurrent health shocks are common phenomenon in village communities in developing economies, and yet formal insurance markets are missing. How individuals’ health capital and health capital productivity affects the performance of informal risk sharing arrangements against short-term and long-term health shocks is less understood in the literature.  In this paper, we use panel household survey data from rural Ethiopia to investigate the extent to which informal risk sharing arrangements provide insurance against health shocks. We estimate dynamic regression models of transfers from different sources or sender households received in cash or in kind. The sender types include benevolent institutions (e.g., churches, mosques, government and non-government aid organizations) and informal sources such as non-resident family members, relatives, friends, neighbors, and members of informal saving and credit associations.   The modeling strategy relies on unobserved effects binary choice and Tobit models, allowing the current period participation and transfers to depend on past participation and transfers from senders.

Preliminary results show that there is negative history dependence in transfers among non-altruistic households in that households with past obligations receive lower transfer amounts in the current period.  On the contrary, there is positive history dependence in transfers among households related by bloodline or kinship. Although aid from benevolent formal institutions such as churches, mosques, and aid organizations constitutes the bulk of transfers made to households in rural Ethiopia, it crowds out transfers from altruistic individuals. Finally, we find that neither short-term nor long-term health shocks are insured through informal risk sharing arrangements among non-altruistic households. This result is in line with findings from previous studies.  However, the result is mixed when it comes to risk sharing by bloodline and kinship. While households with negative long-term health shocks such as physical disabilities receive lower amounts, those with short-term health shocks receive higher transfer amounts from their relatives. Although, individuals related to a household by bloodline provide some insurance against short-term health shocks, they turn their faces away when health shocks are long-term; yet the same group of individuals makes more transfers when it comes to elderly households.