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Consumption Risk-Sharing in Social Networks

  • Attila Ambrus
  • Markus Mobius
  • Adam Szeidl

We develop a model in which connections between individuals serve as social collateral to enforce informal insurance payments. We show that: (i) The degree of insurance is governed by the expansiveness of the network, measured with the per capita number of connections that groups have with the rest of the community. "Two-dimensional" networks?like real-world networks in Peruvian villages?are sufficiently expansive to allow very good risk-sharing. (ii) In second- best arrangements, insurance is local: agents fully share shocks within, but imperfectly between endogenously emerging risk-sharing groups. We also discuss how endogenous social collateral affects our results.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 104 (2014)
Issue (Month): 1 (January)
Pages: 149-82

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Handle: RePEc:aea:aecrev:v:104:y:2014:i:1:p:149-82
Note: DOI: 10.1257/aer.104.1.149
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