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The crowding-out effect of formal insurance on informal risk sharing: An experimental study

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  • Lin, Wanchuan
  • Liu, Yiming
  • Meng, Juanjuan

Abstract

This paper investigates the crowding-out effect of formal insurance on informal risk-sharing arrangements via theory and laboratory experiment. Our model and simulation predict that the crowding out of private transfers is often more than one-for-one and will reduce the total risk coverage. Furthermore, the existence of a moderate degree of altruism exaggerates the crowding-out effect, especially when there is an ex-ante income inequality. These predictions are mostly supported by the laboratory experiment, except that the crowding-out effect is not more than one-for-one, and hence the total risk coverage is not significantly reduced by formal insurance.

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  • Lin, Wanchuan & Liu, Yiming & Meng, Juanjuan, 2014. "The crowding-out effect of formal insurance on informal risk sharing: An experimental study," Games and Economic Behavior, Elsevier, vol. 86(C), pages 184-211.
    • Handle: RePEc:eee:gamebe:v:86:y:2014:i:c:p:184-211
    DOI: 10.1016/j.geb.2014.03.004
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    9. Grimm, Michael & Hartwig, Renate & Reitmann, Ann-Kristin & Bocoum, Fadima Yaya, 2020. "Can informal redistribution withstand formal safety nets? Insights from urban-rural transfers in Burkina Faso," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-81-20, University of Passau, Faculty of Business and Economics.
    10. Lichand, Guilherme & Mani, Anandi, 2016. "Cognitive Droughts," CAGE Online Working Paper Series 298, Competitive Advantage in the Global Economy (CAGE).
    11. Vorlaufer, Tobias & Steimanis, Ivo, 2023. "Solidarity under heterogenous adaptation costs: Experimental evidence on coping after climate hazards," Journal of Environmental Economics and Management, Elsevier, vol. 120(C).
    12. Meike Will & Jürgen Groeneveld & Karin Frank & Birgit Müller, 2021. "Informal risk-sharing between smallholders may be threatened by formal insurance: Lessons from a stylized agent-based model," PLOS ONE, Public Library of Science, vol. 16(3), pages 1-18, March.
    13. Pia, Medrano, 2022. "Insurance and Poverty Reduction: Evidence from Philippine Urban and Rural Households," MPRA Paper 112399, University Library of Munich, Germany.
    14. Grimm, Michael & Hartwig, Renate & Reitmann, Ann-Kristin & Bocoum, Fadima Yaya, 2021. "Inter-household transfers: An empirical investigation of the income-transfer relationship with novel data from Burkina Faso," World Development, Elsevier, vol. 144(C).
    15. Lin, Wanchuan & Meng, Juanjuan & Weng, Xi, 2020. "Formal insurance and informal risk sharing dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 837-863.
    16. Glenn W. Harrison & Jia Min Ng, 2019. "Behavioral insurance and economic theory: A literature review," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(2), pages 133-182, July.
    17. Aida, Takeshi & Sawada, Yasuyuki, 2016. "Altruism or Exchange? Experimental Evidence on the Motives behind Private Transfers in Sri Lanka," Working Papers 132, JICA Research Institute.
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    19. Andinet Woldemichael & Shiferaw Gurmu, 2018. "An Empirical Analysis of Health Shocks and Informal Risk Sharing Networks," African Development Review, African Development Bank, vol. 30(1), pages 100-111, March.
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    More about this item

    Keywords

    Informal risk sharing; Insurance; Crowding-out effect; Altruism;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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