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Risk-sharing networks and farsighted stability

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  • Gilles Grandjean

Abstract

Evidence suggests that in developing countries, agents rely on mutual insurance agreements to deal with income or expenditure shocks. This paper analyzes which risk-sharing networks can be sustained in the long run when individuals are farsighted, in the sense that they are able to forecast how other agents would react to their choice of insurance partners. In particular, we study whether the farsightedness of the agents leads to a reduction of the tension between stability and efficiency that arises when individuals are myopic. We find that for extreme values of the cost of establishing a mutual insurance agreement, myopic and farsighted agents form the same risk-sharing networks. For small costs, farsighted agents form efficient networks while myopic agents don’t. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Gilles Grandjean, 2014. "Risk-sharing networks and farsighted stability," Review of Economic Design, Springer;Society for Economic Design, vol. 18(3), pages 191-218, September.
  • Handle: RePEc:spr:reecde:v:18:y:2014:i:3:p:191-218
    DOI: 10.1007/s10058-013-0148-8
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    More about this item

    Keywords

    Risk-sharing; Networks; Farsighted agents; Stability; Efficiency; C70; D85; O17;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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