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Informal Insurance Arrangements in Village Economies

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Author Info
Ethan Ligon
Jonathan P Thomas
Tim Worrall

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Abstract

This paper studies insurance arrangements in village economies when there is complete information but limited commitment. Commitment is limited because only limited penalties can be imposed on households which renege on their promises. Any efficient insurance arrangements must therefore take into account that households will renege if the benefits from doing so outweigh the costs. We study a general model which admits aggregate and idiosyncratic risk as well as serial correlation of incomes. It is shown that in the case of two households and no storage the efficient insurance arrangement is characterized by a simple updating rule. An example illustrates the similarity of the efficient arrangement to a simple debt contract with occasional debt forgiveness. The model is then extended to multiple households in southern India to test the theory against three alternative models: autarky, full insurance, and a static model of limited commitment due to Coate and Ravaillon (1993). Overall, the model we develop does a significantly better job of explaining the data than does any of these alternatives.

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Publisher Info
Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9705.

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Date of creation: Oct 1997
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Handle: RePEc:san:crieff:9705

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Related research
Keywords: Village economy; efficient insurance; limited commitment;

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Find related papers by JEL classification:
D1 - Microeconomics - - Household Behavior
G2 - Financial Economics - - Financial Institutions and Services
O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  26. Jacoby, Hanan G & Skoufias, Emmanuel, 1997. "Risk, Financial Markets, and Human Capital in a Developing Country," Review of Economic Studies, Blackwell Publishing, vol. 64(3), pages 311-35, July. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Paul Mosley & Robert Holzmann & Steen Jorgensen, 1999. "Social protection as social risk management: conceptual underpinnings for the social protection sector strategy paper," Journal of International Development, John Wiley & Sons, Ltd., vol. 11(7), pages 1005-1027.
  2. Pierre Dubois, 2000. "Assurance complète, hétérogénéité des préférences et métayage au Pakistan," Annales d'Economie et de Statistique, ADRES, issue 59, pages 02, Juillet-S. [Downloadable!]
  3. Morduch, Jonathan, 2002. "Consumption Smoothing Across Space: Testing Theories of Risk-Sharing in the ICRISAT Study Region of South India," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  4. Robert Holzmann & Steen Jørgensen, 2001. "Social Risk Management: A New Conceptual Framework for Social Protection, and Beyond," International Tax and Public Finance, Springer, vol. 8(4), pages 529-556, August. [Downloadable!] (restricted)
  5. Ana María Ibáñez & Andrés Moya, 2006. "The Impact of Intra-State Conflict on Economic Welfare and Consumption Smoothing: Empirical Evidence for the Displaced Population in Colombia," HiCN Working Papers 23, Households in Conflict Network. [Downloadable!]
  6. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 1998. "Mutual Insurance, Individual Savings and Limited Commitment," Keele Department of Economics Discussion Papers (1995-2001) 98/14, Department of Economics, Keele University. [Downloadable!]
    Other versions:
  7. Morduch, Jonathan, 1999. "Between the State and the Market: Can Informal Insurance Patch the Safety Net?," World Bank Research Observer, Oxford University Press, vol. 14(2), pages 187-207, August. [Downloadable!]
  8. Thomas, Jonathan P. & Worrall, Tim, 2002. "Gift-Giving, Quasi-Credit and Reciprocity," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  9. Alan Sutherland, 2002. "International monetary policy coordination and financial market integration," Working Paper Series 174, European Central Bank. [Downloadable!]
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  10. Eliana La Ferrara, . "Ethnicity and Reciprocity: A model of Credit Transactions in Ghana," Working Papers 193, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
  11. Stefan Dercon & Joachim de Weerdt, 2004. "Risk-Sharing Networks And Insurance Against Illness," Development and Comp Systems 0409019, EconWPA. [Downloadable!]
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  12. Jacoby, Hanan G. & Murgai, Rinku & Rehman, Saeed Ur, 2001. "Monopoly power and distribution in fragmented markets : the case of groundwater," Policy Research Working Paper Series 2628, The World Bank. [Downloadable!]
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  13. Paul Huck & Sherrie L. W. Rhine & Philip Bond & Robert Townsend, 1999. "Small business finance in two Chicago minority neighborhoods," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 46-62. [Downloadable!]
  14. Mark Rosenzweig & Andrew D. Foster, 1995. "Imperfect Commitment, Altruism, and the Family: Evidence from Transfer Behavior in Low-Income Rural Areas," Home Pages _075, University of Pennsylvania. [Downloadable!]
    Other versions:
  15. Tim Worrall, 1998. "Risk-Sharing in Village Economies," Keele Department of Economics Discussion Papers (1995-2001) 98/15, Department of Economics, Keele University. [Downloadable!]
  16. de Janvry, Alain & Sadoulet, Elisabeth & Winters, Paul & Murgai, Rinku, 2000. "Localized and Incomplete Mutual Insurance," Working Papers 12905, University of New England, School of Economics. [Downloadable!]
  17. Fernando Alvarez & Urban J. Jermann, 1999. "Quantitative Asset Pricing Implications of Endogenous Solvency Constraints," NBER Working Papers 6953, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Patrick J. Kehoe & Fabrizio Perri, 2000. "International Business Cycles with Endogenous Incomplete Markets," NBER Working Papers 7870, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Alexander Monge-Naranjo & Luis J. Hall, 2003. "Access to Credit and the Effect of Credit Constraints on Costa Rican Manufacturing Firms," RES Working Papers 3164, Inter-American Development Bank, Research Department. [Downloadable!]
  20. Marcel Fafchamps, 2003. "Ethnicity and Networks in African Trade," Contributions to Economic Analysis & Policy, Berkeley Electronic Press, vol. 2(1), pages 1227-1227. [Downloadable!] (restricted)
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  21. Rafael Di Tella & Robert MacCulloch, 2002. "Informal Family Insurance And The Design Of The Welfare State," Economic Journal, Royal Economic Society, vol. 112(481), pages 481-503, July. [Downloadable!] (restricted)
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