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An Experimental Test of Risk-Sharing Arrangements

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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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~04-04-02.

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Date of creation: 02 Apr 2004
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Handle: RePEc:geo:guwopa:gueconwpa~04-04-02
Contact details of provider: Postal: Georgetown University Department of Economics Washington, DC 20057-1036
Phone: 202-687-6074
Fax: 202-687-6102
Web page: http://econ.georgetown.edu/
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Order Information: Postal: Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036
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  1. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 167-96, March.
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  3. John Bone & John Hey & John Suckling, . "A Simple Risk-Sharing Experiment," Discussion Papers 00/36, Department of Economics, University of York.
  4. Dubois, Pierre & Ligon, Ethan A., 2011. "Incentives and nutrition for rotten kids: intrahousehold food allocation in the Philippines," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0c6758hs, Department of Agricultural & Resource Economics, UC Berkeley.
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  9. Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
  10. Charness, Gary & Rabin, Matthew, 2001. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series qt4qz9k8vg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  12. Selten, Reinhard & Abdolkarim Sadrieh & Klaus Abbink, 1995. "Money does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse," Discussion Paper Serie B 343, University of Bonn, Germany.
  13. Paul Gertler & Jonathan Gruber, 1998. "Insuring Consumption Against Illness," JCPR Working Papers 41, Northwestern University/University of Chicago Joint Center for Poverty Research.
  14. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
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  17. repec:cdl:agrebk:2221195 is not listed on IDEAS
  18. 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.
  19. Gary Charness & Nuno Garoupa, 2000. "Reputation, Honesty, and Efficiency with Insider Information: an Experiment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 425-451, 06.
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