Working Paper: NBER ID: w15719
Authors: Attila Ambrus; Markus Mobius; Adam Szeidl
Abstract: We develop a model of informal risk-sharing in social networks, where relationships between individuals can be used as social collateral to enforce insurance payments. We characterize incentive compatible risk-sharing arrangements and obtain two results. (1) The degree of informal insurance is governed by the expansiveness of the network, measured by the number of connections that groups of agents have with the rest of the community, relative to group size. Two-dimensional networks, where people have connections in multiple directions, are sufficiently expansive to allow very good risk-sharing. We show that social networks in Peruvian villages satisfy this dimensionality property; thus, our model can explain Townsend's (1994) puzzling observation that village communities often exhibit close to full insurance. (2) In second-best arrangements, agents organize in endogenous "risk-sharing islands" in the network, where shocks are shared fully within, but imperfectly across islands. As a result, network based risk-sharing is local: socially closer agents insure each other more.
Keywords: risk-sharing; social networks; informal insurance; network structure
JEL Codes: D02; D31; D70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expansiveness of the network (D85) | degree of informal insurance (G52) |
| network structure (D85) | consumption patterns during shocks (D12) |
| social proximity (Z13) | risk-sharing capabilities (D16) |
| agents organizing into endogenous risk-sharing islands (D52) | consumption shocks sharing (E21) |