Consumption Insurance against Unforeseen Epidemics: The Case of Avian Influenza in Vietnam*

We examine how households protected their livelihood against an unexpected negative shock caused by the highly pathogenic avian influenza (HPAI). We also compare HPAI with other shocks such as sickness, ceremonial events, typhoons, floods, droughts, and unemployment. We apply the augmented testing framework of the canonical consumption risk-sharing hypothesis developed by Fafchamps and Lund (2003) to our unique household panel data that was collected in two Vietnamese villages exclusively for this study. While we reject the full consumption risk-sharing hypothesis strongly, our empirical results reveal that informal credit transactions played an important role for those affected by HPAI in coping with the unforeseen negative asset shock that it created. Moreover, our result suggests that the informal and/or formal insurance network against an unforeseen event has been strengthened after awhile