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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. Gary Charness & Matthew Rabin, 2003. "Understanding Social Preferences with Simple Tests," General Economics and Teaching, EconWPA 0303002, EconWPA.
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  7. Dubois, Pierre & Ligon, Ethan A., 2011. "Incentives and nutrition for rotten kids: intrahousehold food allocation in the Philippines," CUDARE Working Paper Series, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy 1114, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  8. John Bone & John Hey & John Suckling, 2004. "A Simple Risk-Sharing Experiment," Journal of Risk and Uncertainty, Springer, Springer, vol. 28(1), pages 23-38, January.
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  10. John Duffy & Jack Ochs, 2004. "Cooperative Behavior and the Frequency of Social Interaction," Levine's Working Paper Archive 122247000000000060, David K. Levine.
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  15. Selten, Reinhard & Ockenfels, Axel, 1998. "An experimental solidarity game," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 34(4), pages 517-539, March.
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Citations

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Cited by:
  1. Todd Cherry & E. Lance Howe & James J. Murphy, 2012. "Sharing as Risk Pooling in a Social Dilemma Experiment," Working Papers, University of Alaska Anchorage, Department of Economics 2012-01, University of Alaska Anchorage, Department of Economics.
  2. Pascaline Dupas & Jonathan Robinson, 2009. "Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya," NBER Working Papers 14693, National Bureau of Economic Research, Inc.
  3. Robinson, Jonathan, 2008. "Limited Insurance Within the Household: Evidence from a Field Experiment in Kenya," MPRA Paper 8314, University Library of Munich, Germany.
  4. Tausch, Franziska & Potters, Jan & Riedl, Arno, 2010. "Preferences for Redistribution and Pensions: What Can We Learn from Experiments?," IZA Discussion Papers 5090, Institute for the Study of Labor (IZA).
  5. Filippin, Antonio & Crosetto, Paolo, 2014. "A Reconsideration of Gender Differences in Risk Attitudes," IZA Discussion Papers 8184, Institute for the Study of Labor (IZA).
  6. Lucy Ackert & Ann Gillette & Jorge Martinez-Vazquez & Mark Rider, 2011. "Are benevolent dictators altruistic in groups? A within-subject design," Experimental Economics, Springer, Springer, vol. 14(3), pages 307-321, September.
  7. Charness, Gary & Viceisza, Angelino, 2012. "Comprehension and Risk Elicitation in the Field: Evidence from Rural Senegal," University of California at Santa Barbara, Economics Working Paper Series, Department of Economics, UC Santa Barbara qt5512d150, Department of Economics, UC Santa Barbara.
  8. Katerina Sherstyuk & Nori Tarui & Tatsuyoshi Saijo, 2011. "Payment Schemes in Infinite-Horizon Experimental Games," Working Papers, University of Hawaii at Manoa, Department of Economics 201118, University of Hawaii at Manoa, Department of Economics.
  9. Ruth Hill & Angelino Viceisza, 2012. "A field experiment on the impact of weather shocks and insurance on risky investment," Experimental Economics, Springer, Springer, vol. 15(2), pages 341-371, June.
  10. Hill, Ruth Vargas & Viceisza, Angelino, 2010. "An experiment on the impact of weather shocks and insurance on risky investment," IFPRI discussion papers, International Food Policy Research Institute (IFPRI) 974, International Food Policy Research Institute (IFPRI).

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