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Consumption Risk-sharing in Social Networks

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  • Attila Ambrus
  • Markus Mobius
  • Adam Szeidl

Abstract

We develop a model of informal risk-sharing in social networks, where relationships between individuals can be used as social collateral to enforce insurance payments. We characterize incentive compatible risk-sharing arrangements and obtain two results. (1) The degree of informal insurance is governed by the expansiveness of the network, measured by the number of connections that groups of agents have with the rest of the community, relative to group size. Two-dimensional networks, where people have connections in multiple directions, are sufficiently expansive to allow very good risk-sharing. We show that social networks in Peruvian villages satisfy this dimensionality property; thus, our model can explain Townsend's (1994) puzzling observation that village communities often exhibit close to full insurance. (2) In second-best arrangements, agents organize in endogenous "risk-sharing islands" in the network, where shocks are shared fully within, but imperfectly across islands. As a result, network based risk-sharing is local: socially closer agents insure each other more.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15719.

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Date of creation: Feb 2010
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Publication status: published as Ambrus A, Mobius M, Szeidl A. Consumption Risk-sharing in Social Networks. American Economic Review. 2014;104(1):149-82.
Handle: RePEc:nbr:nberwo:15719

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  1. Dean Karlan & Markus Mobius & Tanya Rosenblat & Adam Szeidl, 2009. "Trust and Social Collateral," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(3), pages 1307-1361, August.
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Citations

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Cited by:
  1. Marco Pelliccia, 2012. "Risk-sharing and probabilistic network structure," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 1214, Birkbeck, Department of Economics, Mathematics & Statistics.
  2. Garance Genicot, Orazio Attanasio, Abigail Barr, Juan Camilo Cardenas and Costas Meghir, 2011. "Risk Pooling, Risk Preferences, and Social Networks," Working Papers, Georgetown University, Department of Economics gueconwpa~11-11-05, Georgetown University, Department of Economics.
  3. Konrad B. Burchardi & Tarek A. Hassan, 2013. "The Economic Impact of Social Ties: Evidence from German Reunification," The Quarterly Journal of Economics, Oxford University Press, vol. 128(3), pages 1219-1271.
  4. Feigenberg, Benjamin & Field, Erica Marie & Pande, Rohini, 2010. "Building Social Capital Through Microfinance," Scholarly Articles 4449105, Harvard Kennedy School of Government.
  5. Guido Friebel & Juan Miguel Gallego & Mariapia Mendola, 2011. "Xenophobic Attacks, Migration Intentions and Networks: Evidence from the South of Africa," Working Papers, University of Milano-Bicocca, Department of Economics 213, University of Milano-Bicocca, Department of Economics, revised Nov 2011.
  6. Ligon, Ethan & Schechter, Laura, 2011. "Motives for Sharing in Social Networks," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt4sn304b6, Department of Agricultural & Resource Economics, UC Berkeley.
  7. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2013. "Systemic Risk and Stability in Financial Networks," NBER Working Papers 18727, National Bureau of Economic Research, Inc.
  8. Belhaj, Mohamed & Deroïan, Frédéric, 2012. "Risk taking under heterogenous revenue sharing," Journal of Development Economics, Elsevier, Elsevier, vol. 98(2), pages 192-202.
  9. Pierucci, Eleonora & Ventura, Luigi, 2012. "International risk sharing and globalization," MPRA Paper 35869, University Library of Munich, Germany.
  10. Lee, Samuel & Persson, Petra, 2012. "Financing from Family and Friends," Working Paper Series, Research Institute of Industrial Economics 933, Research Institute of Industrial Economics.
  11. Pierre Régibeau & Katharine Rockett, 2013. "Economic analysis of resilience: A framework for local policy response based on new case studies," Journal of Innovation Economics, De Boeck Université, De Boeck Université, vol. 0(1), pages 107-147.

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