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Policy-Making and the Adaptability of Informal Institutions

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  • Xiao Yu Wang

Abstract

This article discusses several of the insights generated by a theory of the formation of relationships between heterogeneously risk-averse individuals who lack access to formal insurance. An example illustrates the policy relevance of the theory, and demonstrates a relationship between the emergence of entrepreneurship in developing economies and higher income inequality. Reducing aggregate risk is a strict Pareto improvement if relationships in the status quo are assumed to remain constant, but is shown to be particularly harmful for the most risk-averse individuals and to exacerbate inequality when the endogenous network response is taken into account: the least risk-averse individuals abandon their roles as informal insurers in favor of entrepreneurial partnerships.

Suggested Citation

  • Xiao Yu Wang, 2015. "Policy-Making and the Adaptability of Informal Institutions," The World Bank Economic Review, World Bank, vol. 29(suppl_1), pages 174-181.
    • Handle: RePEc:oup:wbecrv:v:29:y:2015:i:suppl_1:p:s174-s181.
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    File URL: http://hdl.handle.net/10.1093/wber/lhv022
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