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Risk-Sharing Networks

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  • Yann Bramoullé
  • Rachel Kranon

Abstract

This paper considers the formation of risk-sharing networks. Following empirical findings, we build a model where risk-sharing takes place between pairs of individuals. We ask what structures emerge when pairs can agree to form links, but people cannot coordinate links across a population. We consider a benchmark model where identical individuals commit to share their monetary holdings equally with linked partners. We compare efficient networks to equilibrium networks. Efficient networks can (indirectly) connect all individuals and involve full insurance. However, equilibrium networks connect fewer individuals. There is an externality: when breaking a link individuals do not take into account the negative effect on others distant in the network. The network formation process can lead identical individuals to be in different positions and thus have different risk-sharing outcomes. These results may help explain empirical findings that risk-sharing is often not symmetric or complete.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0526.

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Date of creation: 2005
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Handle: RePEc:lvl:lacicr:0526

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Keywords: Informal insurance; social networks;

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  1. Stefan Dercon & Joachim De Weerdt, 2002. "Risk-sharing Networks and Insurance against illness," Economics Series Working Papers WPS/2002-16, University of Oxford, Department of Economics.
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  8. 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.
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  10. de Janvry, Alain & Sadoulet, Elisabeth & Winters, Paul C. & Murgai, Rinku, 2000. "Localized and Incomplete Mutual Insurance," Working Papers 12905, University of New England, School of Economics.
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  13. Kirman, Alan, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 137-56, February.
  14. Coate, S. & Ravallion, M., 1989. "Reciprocity Without Commitment: Characterization and Performance of Informal Risk-Sharing Arrangements," Papers 96, Warwick - Development Economics Research Centre.
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  16. Kimball, Miles S, 1988. "Farmers' Cooperatives as Behavior Toward Risk," American Economic Review, American Economic Association, vol. 78(1), pages 224-32, March.
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