Risk pooling and limited commitment: an experimental analysis
AbstractThis paper presents rigorous and direct tests of two assumptions relating to limited commitment and asymmetric information that underpin current models of risk pooling. A specially designed economic experiment involving 678 subjects across 23 Zimbabwean villages is used to solve the problems of observability and quantification that have frustrated previous attempts to conduct such tests. I find that more extrinsic commitment is associated with more risk pooling, but that more information is associated with less risk pooling. The first of these results accords with our expectations and assumptions. The second does not. I offer two explanations as to the origin of the second result and discuss their implications for how we view the assumptions made elsewhere in the literature. I also conduct a test of the relevance or external validity of the experimental results to our understanding of real risk pooling behaviour. In four out of the five villages for which the test could be conducted the networks of risk pooling contracts constructed during the experiment and the networks existing in real life were significantly correlated.
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Bibliographic InfoPaper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2003-05.
Date of creation: 2003
Date of revision:
Field experiment; Asymmetric information; Limited commitment; Villages; Economic development; Risk; Insurance.;
Find related papers by JEL classification:
- C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
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- Marcel Fafchamps, 2004. "Social Capital and Development," Economics Series Working Papers 214, University of Oxford, Department of Economics.
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