Insurance without formal insurance: the buffering role of social capital in rural Ethiopia

The literature is unclear whether social capital can insure effectively against shocks. We provide evidence from rural Ethiopia, a setting characterized by prevalent shocks, lack of formal insurance markets, and functioning informal traditional institutions, using four waves of household panel surveys with over 6000 observations. We measure social capital as the social network-based resources available to rural households via local informal institutions, alternatively measured as network size, network diversity, and simple membership in institutions. Fixed effect estimation results show that the buffering role of social capital extends beyond insurance against idiosyncratic shocks, with variation across welfare and social capital measures. Social capital helps protect against multiple and simultaneous shocks, buffering shortfalls in not only total consumption but also food and consumables consumption. Rural households thus benefit from informal insurance in local institutions in the absence of formal insurance markets. Rural insurance policies and efforts to address food insecurity and rural development challenges should consider resources embedded in these institutions.