Working Paper: CEPR ID: DP16621
Authors: Tizi Bene; Yann Bramoull; Frdric Deroan
Abstract: We study how altruism networks affect the adoption of formal insurance. Agentshave private CARA utilities and are embedded in a network of altruistic relationships.Incomes are subject to both a common shock and a large idiosyncratic shock. Agentscan adopt formal insurance to cover the common shock. We show that ex-post altruistictransfers induce interdependence in ex-ante adoption decisions. We characterize theNash equilibria of the insurance adoption game. We show that adoption decisions aresubstitutes and that the number of adopters is unique in equilibrium. The demand forformal insurance is lower with altruism than without at low prices, but higher at highprices. Remarkably, individual incentives are aligned with social welfare. We extendour analysis to CRRA utilities and to a fixed utility cost of adoption.
Keywords: formal insurance; informal transfers; altruism networks
JEL Codes: C72; D85
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Altruism networks (D64) | Demand for formal insurance (G52) |
| Altruistic transfers (D64) | Interdependence in decisions to adopt formal insurance (G52) |
| More agents adopting formal insurance (G52) | Incentives for others to adopt formal insurance decrease (G52) |
| Altruism (D64) | Demand for formal insurance at low prices (G52) |
| Altruism (D64) | Demand for formal insurance at high prices (G52) |
| Individual incentives to adopt formal insurance (G52) | Align with social welfare (I39) |
| Nash equilibria of the insurance game (C72) | Constrained Pareto efficient (D61) |