Columbia International Affairs Online: Working Papers

CIAO DATE: 05/2013

Remittances, Informal Loans, and Assets as Risk-Coping Mechanisms: Evidence from Agricultural Households in Rural Philippines

Marjorie C. Pajaron

November 2012

Asia-Pacific Research Center


This paper investigates whether agricultural households in the rural Philippines insure their consumption against income shocks and whether they use migration, remittances, informal loans, or assets as ex post risk-coping mechanisms. Since these households have limited access to formal insurance and credit markets, any shocks to their volatile income can have substantial impacts. Using panel data, and rainfall shocks as the instrumental variable for income shocks, this paper finds little evidence of effective risk-sharing within the networks of family and friends. 2SLS, OLS, and SUR estimates show that only about 16 percent of consumption is insured. While domestic remittances from other families replace about 51 percent of income decline, informal loans decrease by about 34 percent. Additional tests, however, reveal that agricultural households engage in entrepreneurial activity when rainfall increases and children are somehow protected from the adverse effects of rainfall shocks. Hours spent on own family-operated businesses likewise increase.