| In the small African country of The Gambia, the majority of the population is dependent on unstable agricultural income. However, as is the case in most less developed countries, the formal markets for trading in risk are virtually nonexistent. Farmers and others must, as a result, rely on informal mechanisms as strategies to deal with income risk, and for credit and insurance in general. Consumption smoothing across households carried out through informal risk-sharing arrangements include remittances between friends and family as well as credit contracts with state-contingent repayments.;The principal objective of risk-sharing is to verify that observed consumption patterns are consistent with patterns predicted by insurance models. The Arrow-Debreu full insurance model focuses on consumption smoothing across different states of nature at each particular point in time through state-contingent contracts. The empirical framework derived from the Arrow-Debreu model is applied to small villages in the McCarthy Island Division South (MID-South) of The Gambia to find out whether financial markets are arrangements for risk-sharing. The results support the hypothesis that state-contingent loans are prevalent in rural Gambia and that there is full risk-sharing among participants in the financial markets. |
