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Informal Risk Sharing in an Infinite-horizon Experiment

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  • Charness, Gary B
  • Genicot, Garance

Abstract

This paper presents the first laboratory study of risk-sharing without commitment. Our experiment captures the main features of a simple model of voluntary insurance between two agents. In the model, two individuals interact over a potential infinite horizon and suffer random income shocks. Risk-averse individuals have incentives to smooth consumption by making transfers to each other. These transfers being voluntary, only self-enforcing risk-sharing arrangements are possible: transfers can never be so large as to tempt individuals to renege on them. This constraint, when binding, has strong implications for the shape of the constrained optimal risk-sharing arrangement. In our experiment, participants are matched in pairs. Each period, one of them, randomly drawn, receives a given amount in addition to its regular income. After observing both incomes, each person in a pair chooses a non-negative transfer to make to the other person. Two features of the experimental design are crucial. First, it is common information that all pairs will be dissolved at the end of each period with a given probability. Participants are informed when this occurs and randomly re-matched. This replicates the effect of infinite-horizon and discounting in the model. Second, at the end of the experiment, a single period is randomly drawn to count for cash payment. This feature is essential for individuals to care about the utility outcome of each period. We find evidence generally consistent with risk sharing, with most transfers coming from individuals who received h in the period. Moreover, in support of the theory, transfers are much higher with a higher continuation probability and they also are highly correlated with the individual’s degree of risk aversion. However, while the model predicts an increase in transfers with ex ante inequality, we observe the opposite effect. This may reflect considerations of identity or group membership.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt9sn8t91g.

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Date of creation: 01 Feb 2008
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Handle: RePEc:cdl:ucsbec:qt9sn8t91g

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Keywords: experiment; gift exchange; informal insurance; risk sharing;

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References

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  1. Stefan Dercon & Pramila Krishnan, 1997. "In sickness and in health... risk-sharing within households in rural Ethiopia," Economics Series Working Papers WPS/1997-12, University of Oxford, Department of Economics.
  2. Paul Gertler & Jonathan Gruber, 1998. "Insuring Consumption Against Illness," JCPR Working Papers 41, Northwestern University/University of Chicago Joint Center for Poverty Research.
  3. Charness, Gary & Rabin, Matthew, 2001. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series qt4qz9k8vg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  8. George A. Akerlof & Rachel E. Kranton, 2000. "Economics And Identity," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 715-753, August.
  9. John Bone & John Hey & John Suckling, . "A Simple Risk-Sharing Experiment," Discussion Papers 00/36, Department of Economics, University of York.
  10. Kenneth M. Kletzer and Brian D. Wright., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research (CIDER) Working Papers C98-100, University of California at Berkeley.
  11. Masaki Aoyagi & Guillaume R. Frechette, 2004. "Collusion in Repeated Games with Imperfect Public Monitoring," Levine's Bibliography 122247000000000127, UCLA Department of Economics.
  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. Jalan, Jyotsna & Ravallion, Martin, 1999. "Are the poor less well insured? Evidence on vulnerability to income risk in rural China," Journal of Development Economics, Elsevier, vol. 58(1), pages 61-81, February.
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  16. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 595-609, October.
  17. Reinhard Selten & Abdolkarim Sadrieh & Klaus Abbink, 1999. "Money Does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse," Theory and Decision, Springer, vol. 46(3), pages 213-252, June.
  18. Dubois, Pierre & Ligon, Ethan A., 2011. "Incentives and nutrition for rotten kids: intrahousehold food allocation in the Philippines," CUDARE Working Paper Series 1114, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
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Citations

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Cited by:
  1. Tausch Franziska & Potters Jan & Riedl Arno, 2011. "Preferences for Redistribution and Pensions: What Can We Learn from Experiments?," Research Memorandum 014, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. Hill, Ruth Vargas & Viceisza, Angelino, 2010. "An experiment on the impact of weather shocks and insurance on risky investment," IFPRI discussion papers 974, International Food Policy Research Institute (IFPRI).
  3. Pascaline Dupas & Jonathan Robinson, 2013. "Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 163-92, January.
  4. Katerina Sherstyuk & Nori Tarui & Tatsuyoshi Saijo, 2013. "Payment schemes in infinite-horizon experimental games," Experimental Economics, Springer, vol. 16(1), pages 125-153, March.
  5. Ruth Hill & Angelino Viceisza, 2012. "A field experiment on the impact of weather shocks and insurance on risky investment," Experimental Economics, Springer, vol. 15(2), pages 341-371, June.
  6. Lucy Ackert & Ann Gillette & Jorge Martinez-Vazquez & Mark Rider, 2011. "Are benevolent dictators altruistic in groups? A within-subject design," Experimental Economics, Springer, vol. 14(3), pages 307-321, September.
  7. Charness, Gary & Viceisza, Angelino, 2011. "Comprehension and risk elicitation in the field: Evidence from rural Senegal," IFPRI discussion papers 1135, International Food Policy Research Institute (IFPRI).
  8. Robinson, Jonathan, 2008. "Limited Insurance Within the Household: Evidence from a Field Experiment in Kenya," MPRA Paper 8314, University Library of Munich, Germany.
  9. Antonio FILIPPIN & Paolo CROSETTO, 2014. "A Reconsideration of Gender Differences in Risk Attitudes," Departmental Working Papers 2014-01, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.

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