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Informal Insurance Networks

Author

Listed:
  • Gao Wayne Yuan

    (Department of Economics, Yale University, 28 Hillhouse Ave., New Haven, CT 06511, USA)

  • Moon Eunyoung

    (University of Liverpool Management School, Chatham Street, Liverpool L69 7ZH, UK)

Abstract

This paper develops a model of risk sharing in which each individual’s income shock is locally shared ex-post given an ex-ante strategically formed network. Emphasizing the informational constraint of the network such that transfers can only be contingent on local information, the model provides characterizations of the ex-ante efficient network and the pairwise stable networks. While it is no surprise that the unique efficient network is the complete graph, it is interesting that any pairwise stable network features low average degree and almost 2-regular structures, even under individual risk heterogeneity, and it tends to exhibit positive assortativity in terms of risk variances. If expected incomes are also locally shared in addition to income shocks, the pairwise stable network may become more densely connected, achieving efficiency under certain parameter values.

Suggested Citation

  • Gao Wayne Yuan & Moon Eunyoung, 2016. "Informal Insurance Networks," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 16(2), pages 455-484, June.
    • Handle: RePEc:bpj:bejtec:v:16:y:2016:i:2:p:455-484:n:5
    DOI: 10.1515/bejte-2015-0006
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    References listed on IDEAS

    as
    1. Jaramillo, Fernando & Kempf, Hubert & Moizeau, Fabien, 2015. "Heterogeneity and the formation of risk-sharing coalitions," Journal of Development Economics, Elsevier, vol. 114(C), pages 79-96.
    2. Belhaj, Mohamed & Deroïan, Frédéric, 2012. "Risk taking under heterogenous revenue sharing," Journal of Development Economics, Elsevier, vol. 98(2), pages 192-202.
    3. Marco Pelliccia, 2012. "Risk-sharing and probabilistic network structure," Birkbeck Working Papers in Economics and Finance 1214, Birkbeck, Department of Economics, Mathematics & Statistics.
    4. Stefan Dercon & Pramila Krishnan, 2000. "In Sickness and in Health: Risk Sharing within Households in Rural Ethiopia," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 688-727, August.
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    Cited by:

    1. Heath Henderson & Arnob Alam, 2022. "The structure of risk-sharing networks," Empirical Economics, Springer, vol. 62(2), pages 853-886, February.

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    More about this item

    Keywords

    network; informal insurance; risk sharing; pairwise stability;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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