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Contract Design in Insurance Groups

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  • Stefan Dercon
  • Tessa Bold

Abstract

In many rural settings, informal mutual support networks have evolved into semiformal insurance groups, such as funeral societies.� Using detailed panel data for six villages in Ethiopia, we can distinguish two types of contracts, in terms of whether payments are only made at the time of death or savings are accumulated by the group based on premiums paid ex-ante.� We characterize these contracts as the coalition-proof equilibria of a symmetric and stationary risk-sharing game, and we show numerically that a contract with savings makes higher demands on enforceability, leading to less cohesive groups finding it in their interest to choose the contract without savings and that coalition-proofness is a necessary condition for the coexistence of both contract types.� We show in the data that the type of contract chosen by groups is correlated with the level of trust and other enforcement improving factors.� We also predict that among the observed contracts, those with group-based savings and ex-ante payments will attain higher welfare in terms of consumption smoothing than those observed using no group savings.� Using panel data, and controlling for household fixed effects and time-varying village level fixed effects, we show that funeral groups are vehicles for risk-sharing and that contract type matters for performance in line with these predictions.� The results appear robust to endogeneity of group formation and endogenous selection into contract types.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 421.

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Date of creation: 01 Jan 2009
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Handle: RePEc:oxf:wpaper:421

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Keywords: Insurance; Savings; Coalition formation;

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  1. Grimard, Franque, 1997. "Household consumption smoothing through ethnic ties: evidence from Cote d'Ivoire," Journal of Development Economics, Elsevier, vol. 53(2), pages 391-422, August.
  2. Stefan Dercon & Joachim de Weerdt, 2004. "Risk-Sharing Networks And Insurance Against Illness," Development and Comp Systems 0409019, EconWPA.
  3. Gauthier, Celine & Poitevin, Michel & Gonzalez, Patrick, 1997. "Ex Ante Payments in Self-Enforcing Risk-Sharing Contracts," Journal of Economic Theory, Elsevier, vol. 76(1), pages 106-144, September.
  4. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
  5. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 531-42, July.
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  7. Udry, Christopher, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 495-526, July.
  8. Marcel Fafchamps & Susan Lund, . "Risk Sharing Networks in Rural Philippines," Working Papers 97014, Stanford University, Department of Economics.
  9. Mark Rosenzweig & Andrew D. Foster, 1995. "Imperfect Commitment, Altruism, and the Family: Evidence from Transfer Behavior in Low-Income Rural Areas," Home Pages _075, University of Pennsylvania.
  10. Karine Gobert & Michel Poitevin, 2006. "Non-commitment and savings in dynamic risk-sharing contracts," Economic Theory, Springer, vol. 28(2), pages 357-372, 06.
  11. Garance Genicot & Debraj Ray, 2003. "Group Formation in Risk-Sharing Arrangements," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 87-113.
  12. Pramila Krishnan & Stefan Dercon, 1997. "In sickness and in health ... risk-sharing within households in rural Ethiopia," CSAE Working Paper Series 1997-12, Centre for the Study of African Economies, University of Oxford.
  13. Stefan Dercon & Pramila Krishnan, 2000. "Vulnerability, seasonality and poverty in Ethiopia," Journal of Development Studies, Taylor & Francis Journals, vol. 36(6), pages 25-53.
  14. Guinnane, T. & Banerjee, A. & Besley, T., 1993. "Thy Neighbor's Keeper: the Design of a Credit Cooperative with Theory and a Test," Papers 705, Yale - Economic Growth Center.
  15. Martin Ravallion & Shubham Chaudhuri, 1997. "Risk and Insurance in Village India: Comment," Econometrica, Econometric Society, vol. 65(1), pages 171-184, January.
  16. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 595-609, October.
  17. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
  18. Douglas Bernheim, B. & Ray, Debraj, 1989. "Collective dynamic consistency in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 295-326, December.
  19. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
  20. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
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Cited by:
  1. Bet Caeyers & Stefan Dercon, 2008. "Political Connections and Social Networks in Targeted Transfer Programmes: Evidence from Rural Ethiopia," CSAE Working Paper Series 2008-33, Centre for the Study of African Economies, University of Oxford.
  2. Zuluaga, Blanca, 2013. "Quality of social networks and educational investment decisions," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 43(C), pages 72-82.

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