Working Paper 313 - Altruism, Insurance, and Costly Solidarity Commitments

We model limited commitment informal insurance networks among individuals whose impurely altruistic marginal gains to giving to others diminish with the number of transfers one makes, giving is costly, and stochastic income has both publicly observable and unobservable components. Contrary to the canonical informal insurance model, in which bigger networks and observable income are preferable, our model predicts that unobservable income shocks may facilitate altruistic giving that better targets the least well of individuals within one's network and that too large a network can overwhelm even an altruistic agent, inducing her to cease giving. We test the empirical salience of the model using a unique data set from southern Ghana. We analyze transfer flows among households by coupling observations of gift-giving networks with experimental cash windfall gains - randomized between private and publicly observable payouts - repeated every other month for a year. The empirical evidence supports the model predictions. The magnitude and progressive targeting of transfers precipitated by private income gains underscores the importance of altruistic, and not just insurance, motives underpinning interhousehold transfers.