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Informal Risk Sharing with Local Information

Author

Listed:
  • Attila Ambrus
  • Wayne Gao
  • Pau Milán

Abstract

This article considers the effect of contracting limitations in risk-sharing networks, arising for example from observability, verifiability, complexity, or cultural constraints. We derive necessary and sufficient conditions for Pareto efficiency under these constraints in a general setting, and we provide an explicit characterization of Pareto efficient bilateral transfer profiles under CARA utility and normally distributed endowments. Our model predicts that network centrality is positively correlated with consumption volatility, as more central agents become quasi-insurance providers to more peripheral agents. The proposed framework has important implications for the empirical specification of risk-sharing tests, allowing for local risk-sharing groups that overlap within the village network.

Suggested Citation

  • Attila Ambrus & Wayne Gao & Pau Milán, 2022. "Informal Risk Sharing with Local Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(5), pages 2329-2380.
    • Handle: RePEc:oup:restud:v:89:y:2022:i:5:p:2329-2380.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab091
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    Citations

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    Cited by:

    1. Bene, Tizié & Bramoullé, Yann & Deroïan, Frédéric, 2024. "Formal insurance and altruism networks," Journal of Development Economics, Elsevier, vol. 171(C).
    2. Mohamed Belhaj & Frédéric Deroïan & Mathieu Faure, 2022. "Do people share opportunities?," Working Papers hal-03921232, HAL.
    3. Christian Cox & Akanksha Negi & Digvijay Negi, 2022. "Risk-Sharing Tests with Network Transaction Costs," Monash Econometrics and Business Statistics Working Papers 5/22, Monash University, Department of Econometrics and Business Statistics.
    4. Pietrobon, Davide, 2024. "The dual role of insurance in input use: Mitigating risk versus curtailing incentives," Journal of Development Economics, Elsevier, vol. 166(C).
    5. Tizié Bene & Yann Bramoullé & Frédéric Deroïan, 2024. "Formal insurance and altruism networks," Post-Print hal-04717990, HAL.

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