Working Paper: NBER ID: w19738
Authors: Krislert Samphantharak; Robert Townsend
Abstract: This paper provides a theory-based empirical framework for understanding the risk and return on productive capital assets and their allocation across activities in an economy characterized by idiosyncratic and aggregate risk and thin formal markets for real and financial assets. We apply our framework to households running business enterprises in Thai villages with extensive networks, taking advantage of panel data: income, assets, consumption, gifts, and loans. We decompose risk and estimate the risk premia faced by households, distinguishing aggregate risk from idiosyncratic, potentially diversifiable risk. This distinction matters for estimating measures of underlying productivity and has important policy implications.
Keywords: No keywords provided
JEL Codes: D12; D13; G11; L23; L26; O12; O16; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate risk (E10) | higher risk premium (G19) |
| idiosyncratic risk (D81) | lower risk premium (G19) |
| idiosyncratic risk (D81) | net returns closer to unadjusted returns (G19) |
| aggregate risk (E10) | lower net returns after accounting for risk premiums (G12) |
| expected returns (G17) | aggregate risks (E10) |
| idiosyncratic risks (D81) | total risk premiums (G22) |
| aggregate risk + idiosyncratic risk (D89) | understanding of credit constraints (E51) |
| policies aimed at risk sharing (G52) | informed by understanding of aggregate and idiosyncratic risks (D80) |