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The Limits to Local Insurance

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  • Johannes Gierlinger
  • Pau Milán

Abstract

We study decentralized insurance when multiple risks are payoff-relevant, but each agent may only trade a (possibly different) subset of risks. Unless (at least) one agent can trade every risk, insurance markets remain incomplete, and the economy is not resilient to worst-case events. We also identify spill overs in any feasible allocation: others’ inability to trade some risks restricts an agent’s resilience to joint realizations. Unless an agent can trade a superset of i’s risks, agent i is not resilient to them. In an application, we model constraints as risk-sharing networks and measure resilience in a Malawian village.

Suggested Citation

  • Johannes Gierlinger & Pau Milán, 2021. "The Limits to Local Insurance," Working Papers 1293, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1293
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    risk sharing; incomplete markets; market insurance; Networks;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G52 - Financial Economics - - Household Finance - - - Insurance

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