Working Paper: CEPR ID: DP6004
Authors: Pierre Dubois
Abstract: In this paper, we study the determinants of the value of informal risk sharing groups. In particular, we look at the effects of heterogeneity of preferences and of limited commitment constraints that restrict feasible allocations differently if individuals can deviate form risk sharing agreements in coalitions or not. We test empirically several predictable implications in rural Pakistan taking into account the heterogeneity of households' preferences. Our results show that exogenous size of risk sharing groups can be rejected or that only imperfect risk sharing is obtained within the village because of limited commitment and because of the risk of coalition formation that needs to be deterred.
Keywords: coalitions; insurance; limited commitment; Pakistan; risk and risk aversion
JEL Codes: D81; D85; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneity of preferences (D11) | effectiveness of informal risk sharing groups (C92) |
| income correlation (D31) | likelihood of achieving full risk sharing (G52) |
| limited commitment (D10) | risk sharing arrangements (G32) |
| positive income shocks (E25) | deviation from agreements (J52) |
| size of risk sharing groups (C92) | degree of risk aversion (D81) |
| coalition formation (C71) | stability of risk sharing groups (D81) |