The Impact of Conditional Cash Transfer Programs Under Risk-Sharing Arrangements: Schooling and Consumption Smoothing in Rural Mexico

This paper develops and estimates a model of informal risk sharing with limited commitment that incorporates children's school attendance choices. The model is estimated using Mexican rural villages data from the PROGRESA experiment and is used to analyze how the presence of informal risk sharing influences schooling and child labor choices, as well as the effectiveness of conditional cash transfer (CCT) programs. In particular, I compare the outcomes (schooling, child labor, and consumption) generated under the informal risk-sharing model with those that would be obtained, forcing households to make choices under autarky. I evaluate the effect of alternative program designs that were also considered in other papers which did not incorporate inter-household transfers. I find that the number of years of schooling completed at age 18 is 0.5 years lower under autarky than with risk sharing. Also, the effect of CCT on schooling outcomes and welfare of households is larger under autarky than under risk sharing, and CCT increases consumption volatility under risk sharing, especially among households with young children who are subject to the future program benefit.