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An Experimental Test of Risk-Sharing Arrangements

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  • Garance Genicot
  • Gary Charness

Abstract

We investigate risk sharing without commitment by designing an experiment to match a simple model of voluntary insurance between two agents when aggregate income is constant. Participants are matched in pairs. Each period, they receive their income with or without a random component h that one person receives; after observing own and counterpart income, each person in a pair can decide to make a transfer to the other person. It is common information that there is a given probability that all pairs will be dissolved at the end of each period, with participants re-matched. At the end of the experiment, one period is randomly drawn to count for cash payment. Participants all face the same variance in their income, but do not necessarily have the same mean income. This setting allows us to experimentally test different implications of risk sharing without commitment. In particular, we find strong evidence of risk sharing and reciprocal behavior, where transfers are higher with a higher continuation probability and with a higher degree of risk aversion. However, transfers are lower with inequality, in contrast with existing models of both risk sharing and social preferences.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 807.

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Date of creation: 2004
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Handle: RePEc:red:sed004:807

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Keywords: experiments; gift exchange; informal insurance; risk-sharing; social preferences;

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References

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  1. Garance Genicot & Debraj Ray, 2003. "Group Formation in Risk--Sharing Arrangements," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(1), pages 87-113, January.
  2. Charness, Gary & Rabin, Matthew, 2001. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt4qz9k8vg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. 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.
  4. Udry, Christopher, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 495-526, July.
  5. Abigail Barr & Garance Genicot, 2008. "Risk Sharing, Commitment, and Information: An Experimental Analysis," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(6), pages 1151-1185, December.
  6. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, Econometric Society, vol. 62(3), pages 539-91, May.
  7. Dubois, Pierre & Ligon, Ethan A., 2011. "Incentives and nutrition for rotten kids: intrahousehold food allocation in the Philippines," CUDARE Working Paper Series, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy 1114, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  8. Paul Gertler & Jonathan Gruber, 2002. "Insuring Consumption Against Illness," American Economic Review, American Economic Association, American Economic Association, vol. 92(1), pages 51-70, March.
  9. John Bone & John Hey & John Suckling, 2004. "A Simple Risk-Sharing Experiment," Journal of Risk and Uncertainty, Springer, Springer, vol. 28(1), pages 23-38, January.
  10. Selten, Reinhard & Abdolkarim Sadrieh & Klaus Abbink, 1995. "Money does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse," Discussion Paper Serie B 343, University of Bonn, Germany.
  11. Kenneth M. Kletzer & Brian D. Wright, 2000. "Sovereign Debt as Intertemporal Barter," International Finance, EconWPA 0003004, EconWPA.
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  13. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198288244, October.
  14. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, Springer, vol. 8(2), pages 167-96, March.
  15. Gary Charness & Nuno Garoupa, 2000. "Reputation, Honesty, and Efficiency with Insider Information: an Experiment," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 9(3), pages 425-451, 06.
  16. Cason, Timothy N., 1995. "Cheap talk price signaling in laboratory markets," Information Economics and Policy, Elsevier, Elsevier, vol. 7(2), pages 183-204, June.
  17. George A. Akerlof & Rachel E. Kranton, 2000. "Economics And Identity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(3), pages 715-753, August.
  18. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(4), pages 595-609, October.
  19. Cox, James C., 2004. "How to identify trust and reciprocity," Games and Economic Behavior, Elsevier, Elsevier, vol. 46(2), pages 260-281, February.
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Citations

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Cited by:
  1. Abigail Barr & Garance Genicot, 2007. "Risk Sharing, Commitment and Information: An experimental analysis," Economics Series Working Papers WPS/2007-17, University of Oxford, Department of Economics.
  2. Lucy F. Ackert & Ann B. Gillette & Jorge Martinez-Vazquez & Mark Rider, 2009. "Risk Tolerance, Self-Interest, and Social Preferences," Experimental Economics Center Working Paper Series, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University 2009-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University, revised Feb 2011.
  3. Robinson, Jonathan, 2008. "Limited Insurance Within the Household: Evidence from a Field Experiment in Kenya," Santa Cruz Department of Economics, Working Paper Series qt2px0t7pt, Department of Economics, UC Santa Cruz.
  4. Nadja Trhal & Ralf Radermacher, 2006. "Bad luck vs. self-inflicted neediness – An experimental investigation of gift giving in a solidarity game," Working Paper Series in Economics, University of Cologne, Department of Economics 28, University of Cologne, Department of Economics, revised 07 Mar 2008.
  5. Adaman, Fikret & Ardic, Oya Pinar & Tuzemen, Didem, 2006. "Network Effects in Risk Sharing and Credit Market Access: Evidence from Istanbul," MPRA Paper 4078, University Library of Munich, Germany, revised 01 Dec 2006.
  6. A. Chaudhuri & L. Gangadharan & Pushkar Maitra, 2005. "An Experimental Analysis ofGroup Size and Risk Sharing," Department of Economics - Working Papers Series, The University of Melbourne 955, The University of Melbourne.
  7. Charness, Gary & Grieco, Daniela, 2013. "Individual Creativity, Ex-ante Goals and Financial Incentives," University of California at Santa Barbara, Economics Working Paper Series qt4mr6p1d5, Department of Economics, UC Santa Barbara.

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