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Sharing as Risk Pooling in a Social Dilemma Experiment

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  • Todd Cherry

    ()
    (Department of Economics, Appalachian State University)

  • E. Lance Howe

    ()
    (Department of Economics, University of Alaska Anchorage)

  • James J. Murphy

    ()
    (Department of Economics, University of Alaska Anchorage)

Abstract

In rural economies with missing or incomplete markets, idiosyncratic risk is frequently pooled through informal networks. Idiosyncratic shocks, however, are not limited to private goods but can also restrict an individual from partaking in or benefitting from a collective activity. In these situations, a group must decide whether to provide insurance to the affected member. In this paper, we describe results of a laboratory experiment designed to test whether a simple sharing institution can sustain risk pooling in a social dilemma with idiosyncratic risk. We test whether risk can be pooled without a commitment device and, separately, whether effective risk pooling induces greater cooperation in the social dilemma. We find that even in the absence of a commitment device or reputational considerations, subjects voluntarily pool risk thereby reducing variance in individual earnings. In spite of effective risk pooling, however, cooperation in the social dilemma is unaffected.

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File URL: http://www.econpapers.uaa.alaska.edu/RePEC/ala/wpaper/ALA201201.pdf
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Bibliographic Info

Paper provided by University of Alaska Anchorage, Department of Economics in its series Working Papers with number 2012-01.

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Date of creation: Apr 2012
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Handle: RePEc:ala:wpaper:2012-01

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Web page: http://www.cbpp.uaa.alaska.edu/CBPPHome/DepartmentsandMajors/Economics.aspx
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Keywords: lab experiment; public goods; risk; shock; sharing;

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  1. De Weerdt, Joachim & Dercon, Stefan, 2006. "Risk-sharing networks and insurance against illness," Journal of Development Economics, Elsevier, vol. 81(2), pages 337-356, December.
  2. Harounan Kazianga & Christopher Udry, 2004. "Consumption Smoothing? Livestock, Insurance and Drought in Rural Burkina Faso," Working Papers 898, Economic Growth Center, Yale University.
  3. Lata Gangadharan & Veronika Nemes, 2009. "Experimental Analysis Of Risk And Uncertainty In Provisioning Private And Public Goods," Economic Inquiry, Western Economic Association International, vol. 47(1), pages 146-164, 01.
  4. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
  5. Selten, Reinhard & Ockenfels, Axel, 1998. "An experimental solidarity game," Journal of Economic Behavior & Organization, Elsevier, vol. 34(4), pages 517-539, March.
  6. Marcel Fafchamps & Susan Lund, . "Risk Sharing Networks in Rural Philippines," Working Papers 97014, Stanford University, Department of Economics.
  7. 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.
  8. Marcel Fafchamps & Chris Udry & Katherine Czukas, . "Drought and Saving in West Africa: Are Livestock a Buffer Stock?," Working Papers 97013, Stanford University, Department of Economics.
  9. Fafchamps, Marcel & Gubert, Flore, 2007. "The formation of risk sharing networks," Journal of Development Economics, Elsevier, vol. 83(2), pages 326-350, July.
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