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Risk-sharing networks

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  • Bramoullé, Yann
  • Kranton, Rachel

Abstract

This paper considers the formation of risk-sharing networks. Following empirical findings, we build a model where pairs form links, but a population cannot coordinate links. As a benchmark, individuals commit to share monetary holdings equally with linked partners. We find efficient networks can (indirectly) connect all individuals and involve full insurance. But equilibrium networks connect fewer individuals. When breaking links, individuals do not consider negative externalities on others in the network. Thus identical individuals can end up in different positions in a network and have different outcomes. These results may help to explain empirical findings that risk-sharing is often asymmetric.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 64 (2007)
Issue (Month): 3-4 ()
Pages: 275-294

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Handle: RePEc:eee:jeborg:v:64:y:2007:i:3-4:p:275-294

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Keywords: Informal insurance Incomplete risk sharing;

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  1. de Janvry, Alain & Sadoulet, Elisabeth & Winters, Paul C. & Murgai, Rinku, 2000. "Localized and Incomplete Mutual Insurance," Working Papers 12905, University of New England, School of Economics.
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  5. Francis Bloch (GREQAM and Universite de la Mediterranee), Garance Genicot (Georgetown University, and Debraj Ray (New York University and Instituto de Analisis Economico (CSIC)), 2004. "Informal Insurance in Social Networks," Working Papers gueconwpa~04-04-16, Georgetown University, Department of Economics.
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  7. Marcel Fafchamps & Susan Lund, 2000. "Risk-Sharing Networks in Rural Philippines," Economics Series Working Papers 10, University of Oxford, Department of Economics.
  8. Udry, Christopher, 1995. "Risk and Saving in Northern Nigeria," American Economic Review, American Economic Association, vol. 85(5), pages 1287-1300, December.
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  10. Kimball, Miles S, 1988. "Farmers' Cooperatives as Behavior Toward Risk," American Economic Review, American Economic Association, vol. 78(1), pages 224-32, March.
  11. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
  12. Garance Genicot & Debraj Ray, 2003. "Group Formation in Risk--Sharing Arrangements," Review of Economic Studies, Wiley Blackwell, vol. 70(1), pages 87-113, January.
  13. Jackson, Matthew O., 1998. "The Evolution of Social and Economic Networks," Working Papers 1044, California Institute of Technology, Division of the Humanities and Social Sciences.
  14. De Weerdt, Joachim, 2002. "Risk-Sharing and Endogenous Network Formation," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  15. Coate, S. & Ravallion, M., 1989. "Reciprocity Without Commitment: Characterization and Performance of Informal Risk-Sharing Arrangements," Papers 96, Warwick - Development Economics Research Centre.
  16. Coate, Stephen & Ravallion, Martin, 1993. "Reciprocity without commitment : Characterization and performance of informal insurance arrangements," Journal of Development Economics, Elsevier, vol. 40(1), pages 1-24, February.
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