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Informal Risk Sharing in an Infinite-Horizon Experiment

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  • Gary Charness
  • Garance Genicot

Abstract

Our laboratory study of risk sharing without commitment captures the main features of a simple model of voluntary insurance. Participants are paired in matches with stochastic endings. Each period they receive fixed endowments and one of the pair (randomly-drawn) also receives an additional amount; they can then make voluntary transfers to each other. While smoothing consumption is attractive, only self-enforcing risk sharing is possible. We find evidence supporting the theory: transfers provide insurance to individuals, a higher match continuation probability raises transfers and more risk-averse individuals make larger transfers. More surprisingly, transfers decrease with ex ante inequality, potentially reflecting considerations of identity. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

Suggested Citation

  • Gary Charness & Garance Genicot, 2009. "Informal Risk Sharing in an Infinite-Horizon Experiment," Economic Journal, Royal Economic Society, vol. 119(537), pages 796-825, April.
    • Handle: RePEc:ecj:econjl:v:119:y:2009:i:537:p:796-825
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