Imperfect commitment, altruism, and the family: Evidence from transfer behavior in low-income rural areas

In this paper, we examine empirically whether risk pooling is more advantageous among altruistic compared to selfish agents in a framework where individuals cannot make binding commitments. In particular, we incorporate altuism into a model of risk sharing under imperfect commitment and use simulation methods to establish tests of the roles of both altruism and commitment problems in determining the extent of insurance and the intertemporal movements in interhousehold transfers. The tests are carried out using three panel data sets from two countries of rural South Asia that provide detailed information on transfers and enable the measurement of income shocks. The estimates provide strong support for the notion that imperfect commitment substantially constrains informal transfer arrangements, whether kin-based or not, but also provide evidence that altruism plays an important role in ameliorating commitment constraints and thus in increasing the gains from income pooling.