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Informal Insurance with Endogenous Group Size

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  • Stephanie Weynants

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    (Earth and Life Institute, Universite Catholique de Louvain)

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    Abstract

    We present a theory of endogenous formation of insurance groups which combines heterogeneity on agents' risk aversion under asymmetric information and lack of enforceability of contracts. Income sharing inside the group is decided by majority voting and the size of the group adjusts to this decision through participation constraints. At equilibrium, all group members agree on the same imperfect level of income sharing, which yields a constrained-efficient equilibrium. Comparative statics on the risk faced by the community provide interesting results. A mean preserving spread of income implies more income sharing and a larger group size. New members, and possibly even old members may be better o¤, while non-members are worse-o¤. These results have relevant policy implications.

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    File URL: http://www.fundp.ac.be/eco/economie/recherche/wpseries/wp/1107.pdf
    File Function: First version, 2011
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    Bibliographic Info

    Paper provided by University of Namur, Department of Economics in its series Working Papers with number 1107.

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    Length: 27 pages
    Date of creation: May 2011
    Date of revision:
    Handle: RePEc:nam:wpaper:1107

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