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Informal Insurance and Income Inequality

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  • Laczó, Sarolta

Abstract

This paper examines the effects of income inequality in a risk sharing model with limited commitment, that is, when insurance agreements have to be self-enforcing. In this context, numerical dynamic programming is used to examine three questions. First, I consider heterogeneity in mean income, and study the welfare effects when inequality together with aggregate income increases. Second, subsistence consumption is introduced to see how it affects consumption smoothing. Finally, income is endogenized by allowing households to choose between two production technologies, to look at the importance of consumption insurance for income smoothing.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7197.

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Date of creation: Feb 2008
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Handle: RePEc:pra:mprapa:7197

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Keywords: risk sharing; limited commitment; inequality; technology choice; developing countries;

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