Date of Submission


Date of Award


Institute Name (Publisher)

Indian Statistical Institute

Document Type

Doctoral Thesis

Degree Name

Doctor of Philosophy

Subject Name

Quantitative Economics


Economics and Planning Unit (EPU-Delhi)


Ramaswami, Bharat (EPU-Delhi; ISI)

Abstract (Summary of the Work)

Economic agents are exposed to a variety of risks. These risks can generally be categorized into either idiosyncratic individual specific risks or aggregate risks faced jointly by a group of individuals co-inhabiting in villages, communities or countries. Since exposure to both kinds of risks can be welfare reducing, economists for a long time have been interested in studying the role of various formal and informal risk pooling mechanisms in mitigating agents’ exposure to these shocks. The possibility of risk pooling within communities or countries arises from the idea that idiosyncratic risks across individuals, communities or countries are unlikely to be perfectly correlated. Hence, trade across agents can facilitate risk sharing. This holds true in a theoretical model of risk averse agents with stochastic endowments, where the first best allocation amounts to individual consumption being perfectly correlated with aggregate shocks and entirely independent of their own endowments. This isthe main prediction of the risk sharing hypothesis. Chapter 2 of this dissertation uses this risk sharing hypothesis, popular in development economics and international macroeconomics literature to evaluate the allocative efficiency of global food markets.Risk sharing mechanisms fail if shocks are experienced across agents or communities. Such shocks are correlated and survive pooling and aggregation. It is well known that exposure to correlated shocks under credit constraints can translate into poverty traps. This understanding has led to the emergence of formal insurance markets and insurance products specifically designed to insure farmers in developing countries from most common form of aggregate shocks i.e., rainfall shocks. Chapter 3 of this dissertation therefore looks at the design risk in rainfall based index insurance contracts in India and studies its implications for optimal demand for rainfall insurance.Although exposure to shocks is welfare reducing, the welfare impacts of a correlated shock may not be homogeneous. A good example of common shocks having heterogeneous welfare impacts across population groups is the food price shocks experienced recently in 2007 and then again in 2011. This idea of price changes having heterogeneous impacts across individuals was explored empirically in Deaton (1989) who proposed that a net food consumer household will experience welfare losses from high food prices but a net food producer will gain. The final chapter of this dissertation uses this insight from Deaton’s net benefit approach to econometrically identify the income and consumption effects of food price shocks on the dietary diversity of households in India.Another dimension shared between chapters 2 and 3 of this dissertation is related to the nature of aggregate and idiosyncratic shocks. Con-ceptually, idiosyncratic shocks will cancel out with aggregation when these are linearly additive. In such a scenario, there is a possibility of insurance through arbitrage. The second chapter, therefore, evaluates the contributions of this arbitrage in risk sharing within the global food markets. This chapter considers consumption variability as the dependent variable and hence directs attention to the variable that matters in economic models. But what if the idiosyncratic shocks are multiplicative rather than additive and are spatially correlated? Such shocks will survive aggregation with the consequence that these will be experienced widely.


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Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.


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