Natural disaster and risk-sharing behavior: evidence from rural Bangladesh

Using a unique field experiment in rural Bangladesh, this paper investigates how exposure to a natural disaster affects risk-sharing behavior. We conducted a risk-sharing experiment that randomly assigned different levels of risk-sharing commitments to individuals who were exposed and unexposed to a recent natural disaster and asked them to form risk-sharing groups. Our results show that disaster-affected individuals are less likely to defect from risk-sharing groups, regardless of the level of ex-ante commitment. Interestingly, individuals from disaster-affected villages chose riskier bets and realized higher average returns compared with individuals from non-disaster-affected areas. Our results have important implications for the design of financial risk-transfer mechanisms in developing countries.