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Localized and Incomplete Mutual Insurance

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Author Info
de Janvry, Alain
Sadoulet, Elisabeth
Winters, Paul
Murgai, Rinku
Abstract

The practice of mutual insurance is conditioned by two types of transaction costs: "association" costs in establishing links with insurance partners and "extraction" costs in using these links to implement insurance transfers. Data on insurance-motivated water exchanges among households along two irrigation canals in Pakistan show that households exchange bilaterally with neighbors and family members but the majority exchange with members of tightly knit clusters. We, therefore, develop a model that endogenizes both cluster formation and the quality of insurance in the chosen cluster as a function of the relative importance of association and extraction costs. Full insurance at the community level, the object of most empirical tests of mutual insurance, is seen to be an extreme case. It is consequently not surprising that tests of the hypothesis of full risk pooling at the community level have led to rejection. The Pakistan data support the proposition that the configuration of insurance clusters and the intensity of exchanges within clusters vary with association and extraction costs. These costs are affected by kinship, distance to neighbors, and exposure to risk. Households with larger kinship groups, closer neighbors, and greater risk exposure insure through larger clusters and more intensive exchange.

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Paper provided by University of New England, School of Economics in its series Working Papers with number 12905.

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Date of creation: 2000
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Handle: RePEc:ags:uneewp:12905

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Keywords: mutual insurance; transaction costs; clusters; Risk and Uncertainty;

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  1. Rosenzweig, Mark R & Stark, Oded, 1989. "Consumption Smoothing, Migration, and Marriage: Evidence from Rural India," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 905-26, August. [Downloadable!] (restricted)
  2. Jalan, Jyotsna & Ravallion, Martin, 1997. "Are the poor less well-insured? Evidence on vulnerability to income risk in rural China," Policy Research Working Paper Series 1863, The World Bank. [Downloadable!]
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  3. 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. [Downloadable!] (restricted)
  4. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 1997. "Informal Insurance Arrangements in Village Economies," Keele Department of Economics Discussion Papers (1995-2001) 97/08, Department of Economics, Keele University, revised Oct 2000. [Downloadable!]
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  5. Udry, Christopher, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 495-526, July. [Downloadable!] (restricted)
  6. Posner, Richard A, 1980. "A Theory of Primitive Society, with Special Reference to Law," Journal of Law & Economics, University of Chicago Press, vol. 23(1), pages 1-53, April.
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  7. Andrew D. Foster & Mark R. Rosenzweig, 2001. "Imperfect Commitment, Altruism, And The Family: Evidence From Transfer Behavior In Low-Income Rural Areas," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 389-407, August. [Downloadable!] (restricted)
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  8. McCarthy, Nancy & de Janvry, Alain & Sadoulet, Elisabeth, 1998. "Land allocation under dual individual-collective use in Mexico," Journal of Development Economics, Elsevier, vol. 56(2), pages 239-264, August. [Downloadable!] (restricted)
  9. Ligon, Ethan, 1994. "Risk-sharing under varying information regimes : theory and measurement in village economies," CUDARE Working Paper Series 727, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  10. Fafchamps, Marcel, 1992. "Solidarity Networks in Preindustrial Societies: Rational Peasants with a Moral Economy," Economic Development and Cultural Change, University of Chicago Press, vol. 41(1), pages 147-74, October.
  11. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October. [Downloadable!] (restricted)
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  12. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-91, May. [Downloadable!] (restricted)
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