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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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    • Francis Bloch (GREQAM and Universite de la Mediterranee), Garance Genicot (Georgetown University, and Debraj Ray (New York University and Instituto de Analisis Economico (CSIC)), 2004. "Informal Insurance in Social Networks," Working Papers gueconwpa~04-04-16, Georgetown University, Department of Economics.
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