Risk Aversion and Household Partition in Rural Mexico

Amar A. Hamoudi, University of Michigan

Living arrangements may be an important component of economic relationships in extended families. One role which has been hypothesized relates the spatial distribution of agricultural families to their exposure to local productivity shocks like weather. Family members may have incentive to live in different locations in order to insure each other against the effects of these shocks. This paper further explores that potential role. I demonstrate formally that under plausible conditions, families would have incentive specifically to distribute their more risk averse members. Drawing on a unique dataset from rural Mexico which provides direct measures of tolerance for financial risk, I show that coresidence patterns are related to family members' risk preferences in a way which would be predicted by a model whereby they take account of their own and each other's comparative advantage as risk-sharing partners when making decisions regarding their living arrangements.