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Localized and Incomplete Mutual Insurance

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  • de Janvry, Alain
  • Sadoulet, Elisabeth
  • Winters, Paul C.
  • 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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Bibliographic Info

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. Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September.
  2. Matthew O. Jackson & Asher Wolinsky, 1994. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  9. Kimball, Miles S, 1988. "Farmers' Cooperatives as Behavior Toward Risk," American Economic Review, American Economic Association, vol. 78(1), pages 224-32, March.
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  12. 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.
  13. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-91, May.
  14. 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.
  15. Strosser, P. & Kuper, M., 1994. "Water markets in the Fordwah/Eastern Sadiqia Area: An answer to perceived deficiencies in canal water supplies?," IWMI Books, Reports H015155, International Water Management Institute.
  16. Grimard, Franque, 1997. "Household consumption smoothing through ethnic ties: evidence from Cote d'Ivoire," Journal of Development Economics, Elsevier, vol. 53(2), pages 391-422, August.
  17. 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.
  18. Robert M. Townsend, 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 83-102, Summer.
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