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Contract Design in Insurance Groups

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  • Tessa Bold
  • Stefan Dercon

Abstract

In many rural settings, informal mutual support networks have evolved into semiformal insurance groups, such as funeral societies. Using detailed panel data for six villages in Ethiopia, we can distinguish two types of contracts, in terms of whether payments are only made at the time of death or savings are accumulated by the group based on premiums paid ex-ante. We characterize these contracts as the coalition-proof equilibria of a symmetric and stationary risk-sharing game, and we show numerically that a contract with savings makes higher demands on enforceability, leading to less cohesive groups finding it in their interest to choose the contract without savings and that coalitionproofness is a necessary condition for the coexistence of both contract types. We show in the data that the type of contract chosen by groups is correlated with the level of trust and other enforcement improving factors. We also predict that among the observed contracts, those with group-based savings and ex-ante payments will attain higher welfare in terms of consumption smoothing than those observed using no group savings. Using panel data, and controlling for household fixed effects and time-varying village level fixed effects, we show that funeral groups are vehicles for risk-sharing and that contract type matters for performance in line with these predictions. The results appear robust to endogeneity of group formation and endogenous selection into contract types.

Suggested Citation

  • Tessa Bold & Stefan Dercon, 2009. "Contract Design in Insurance Groups," CSAE Working Paper Series 2009-04, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2009-04
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    References listed on IDEAS

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    Cited by:

    1. Bet Caeyers & Stefan Dercon, 2012. "Political Connections and Social Networks in Targeted Transfer Programs: Evidence from Rural Ethiopia," Economic Development and Cultural Change, University of Chicago Press, vol. 60(4), pages 639 - 675.

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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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