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An Experimental Test of Risk-Sharing Arrangements

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Abstract

We investigate risk-sharing without commitment by designing an experiment to match a simple model of voluntary insurance between two agents when aggregate income is constant. Participants are matched in pairs. Each period, they receive their income with or without a random component h that one person or the other receives; after observing own and counterpart income, each person in a pair can decide to make a transfer to the other person. It is common information that there is a given probability that all pairs will be dissolved at the end of each period, with participants re-matched. At the end of the experiment, one period is randomly drawn to count for cash payment. Participants all face the same variance in their income, but do not necessarily have the same mean income. This setting allows us to experimentally test different implications of risk-sharing without commitment. In particular, we find strong evidence of risk-sharing and reciprocal behavior, where transfers are higher with a higher continuation probability and with a higher degree of risk aversion. However, transfers are lower with inequality, in contrast with existing models of both risk-sharing and social preferences.

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  • Gary Charness, University of California, Santa Barbara and Garance Genicot,Georgetown University, 2004. "An Experimental Test of Risk-Sharing Arrangements," Working Papers gueconwpa~04-04-02, Georgetown University, Department of Economics.
    • Handle: RePEc:geo:guwopa:gueconwpa~04-04-02
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    Cited by:

    1. Nadja Trhal & Ralf Radermacher, 2006. "Bad luck vs. self-inflicted neediness – An experimental investigation of gift giving in a solidarity game," Working Paper Series in Economics 28, University of Cologne, Department of Economics, revised 07 Mar 2008.
    2. Adaman, Fikret & Ardic, Oya Pinar & Tuzemen, Didem, 2006. "Network Effects in Risk Sharing and Credit Market Access: Evidence from Istanbul," MPRA Paper 4078, University Library of Munich, Germany, revised 01 Dec 2006.
    3. Abigail Barr & Garance Genicot, 2008. "Risk Sharing, Commitment, and Information: An Experimental Analysis," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1151-1185, December.
    4. Lucy F. Ackert & Ann B. Gillette & Jorge Martinez-Vazquez & Mark Rider, 2009. "Risk Tolerance, Self-Interest, and Social Preferences," Experimental Economics Center Working Paper Series 2009-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University, revised Feb 2011.
    5. A. Chaudhuri & L. Gangadharan & Pushkar Maitra, 2005. "An Experimental Analysis ofGroup Size and Risk Sharing," Department of Economics - Working Papers Series 955, The University of Melbourne.
    6. Charness, Gary B & Gneezy, Uri, 2007. "Strong Evidence for Gender Differences in Investment," University of California at Santa Barbara, Economics Working Paper Series qt428481s8, Department of Economics, UC Santa Barbara.
    7. Robinson, Jonathan, 2008. "Limited Insurance Within the Household: Evidence from a Field Experiment in Kenya," Santa Cruz Department of Economics, Working Paper Series qt2px0t7pt, Department of Economics, UC Santa Cruz.
    8. Jonathan Robinson, 2012. "Limited Insurance within the Household: Evidence from a Field Experiment in Kenya," American Economic Journal: Applied Economics, American Economic Association, vol. 4(4), pages 140-164, October.
    9. Charness, Gary & Grieco, Daniela, 2013. "Individual Creativity, Ex-ante Goals and Financial Incentives," University of California at Santa Barbara, Economics Working Paper Series qt4mr6p1d5, Department of Economics, UC Santa Barbara.

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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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