Does Inequality Impede Risk Management? Evidence from a Lab-in-the-Field Experiment in Ghana

Low income households in agrarian developing economies continue to face considerable livelihood risks, which have serious negative impacts on household welfare. Incomplete financial markets present an external constraint on risk management and are well studied in the literature. A growing literature has focused on internal constraints on development, which can negatively affect saving and investment behavior. Here I propose that internal constraints may also hinder risk management. Specifically, I propose that fairness preferences may create an internal constraint on risk-sharing, particularly in a context of wealth inequality. To test this theory, I utilize a lab-in-the-field experiment to investigate the impact of wealth inequality on utilization of risk-management tools and explore how fairness preferences may mediate this effect. I find that inequality reduces risk-sharing and increases demand for insurance. Moreover, I find evidence that fairness preferences create an internal constraint on risk-sharing under inequality