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Formal insurance and informal risk sharing dynamics

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  • Lin, Wanchuan
  • Meng, Juanjuan
  • Weng, Xi

Abstract

This paper investigates whether and how the crowding-out effect of formal insurance on informal risk sharing is mitigated by social preference change. We design a lab experiment in which formal insurance is introduced and removed unexpectedly in a repeated risk-sharing game. We find evidence of social preference change by showing that informal risk sharing is significantly improved after the removal of formal insurance, and the pattern mainly occurs when one subject obtains insurance but the other does not. Findings suggest that it is the insurance purchasers who take the initiative to share more risk for their partners. However, there is no significant improvement in informal risk sharing when insurance purchasing decisions are randomly computer generated. We propose a model based on guilt aversion to explain our findings.

Suggested Citation

  • Lin, Wanchuan & Meng, Juanjuan & Weng, Xi, 2020. "Formal insurance and informal risk sharing dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 837-863.
    • Handle: RePEc:eee:jeborg:v:180:y:2020:i:c:p:837-863
    DOI: 10.1016/j.jebo.2019.04.016
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    3. Paan Jindapon & Pacharasut Sujarittanonta & Ajalavat Viriyavipart, 2022. "Income Interdependence and Informal Risk Sharing Under the Shadow of the Future," PIER Discussion Papers 191, Puey Ungphakorn Institute for Economic Research.

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    More about this item

    Keywords

    Insurance; Risk sharing; Crowding-out; Social preferences; Guilt;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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