The Rich Complexity of Village Life

A Thai village study finds wide variation in risk attitudes, suggesting that policy to smooth economic volatility may need to be nuanced.

The Federal Reserve Bank of Minneapolis: The Region, June 2010

Douglas Clement, Editor

It may be a vestige of colonial history that leads people in industrialized nations to envision village life in developing countries as simple. Lacking the higher education, technology and financial sophistication of economically wealthy societies, goes the thinking, villagers in emerging nations live an uncomplicated, meager existence. Concepts like risk management, portfolio choice, insurance markets? Irrelevant, it would seem, to the life of a simple peasant.

In similar fashion, economists have long treated people in general as uncomplicated, undifferentiated units, neglecting the diversity of human existence that makes life interesting but math difficult. Researchers knew of this diversity, of course, but the absence of detailed data, combined with insufficient mathematical technique, long prevented them from plumbing the infinite variety of human traits and preferences. The “representative agent” has, until recently, been the stand-in for all of humanity.

Fortunately, both of these limited perspectives are changing. Recent research uses more powerful techniques and a singular database to provide a nuanced look at both village life in the developing world and the remarkable variety of human preferences.

In “Heterogeneity and Risk Sharing in Village Economies” (Minneapolis Fed Working Paper 683, January 2011, Pierre-André Chiappori, Krislert Samphantharak, Sam Schulhofer-Wohl, and Robert M. Townsend), the authors look at differences in risk aversion among people (or more accurately, households) in four rural provinces in Thailand. They discover a rich complexity of village economics and a wide range of preferences regarding risk: Some households have an extreme aversion to it; others welcome it.

The research further suggests that before policymakers seek to address poverty by mitigating fluctuations that impose hardships on some villagers, they need to consider this variability. A number of households, the researchers indicate, might actually benefit from volatility in village income. A government program such as crop insurance could therefore have an adverse impact on some. “If aggregate risk were eliminated,” write the researchers, “some relatively risktolerant households would suffer welfare losses.”

This sounds counterintuitive: How can risk reduction be a bad thing? But the finding is wholly consistent with analysis of risk in other settings. And it suggests that viewing risk as an unmitigated evil is as superficial as thinking that villagers in the developing world lead simple lives.

For a full-text copy of the article (including content beyond this introduction), please visit http://www.minneapolisfed.org/pubs/region/11-06/village_life.pdf.