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Limited Commitment, Social Control and Risk-Sharing Coalitions in Village Economies

Author

Listed:
  • Fernando Jaramillo

    (Universidad del Rosario [Bogota])

  • Juan Daniel Hernandez

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay, CEPS - Centre d'Economie de l'ENS Paris-Saclay - Université Paris-Saclay - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay)

  • Hubert Kempf

    (ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay)

  • Fabien Moizeau

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

  • Thomas Vendryes

    (CEPS - Centre d'Economie de l'ENS Paris-Saclay - Université Paris-Saclay - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay)

Abstract

The need to insure against idiosyncratic income risk leads to the formation of risksharing groups in village economies where formal financial markets are absent. We develop a theoretical model to address the impact of limited commitment and social control on the extent of informal risk sharing when agents are induced to form such risk-sharing coalitions. Social control increases the prospect of future punishment of present defectors and thus mitigates the absence of commitment. A defection-proof core-partition exists, is unique and homophilic. Riskier societies may not be more segmented and may not pay a higher cost for insurance. A higher social control leads to a less segmented society but does not necessarily lead to a lower price for sharing risk. We provide evidence, based on data on Thai villages, that consumption smoothing conforms with our theoretical result of homophily-based coalitions and that social control contributes to a lesser segmentation of a society.

Suggested Citation

  • Fernando Jaramillo & Juan Daniel Hernandez & Hubert Kempf & Fabien Moizeau & Thomas Vendryes, 2023. "Limited Commitment, Social Control and Risk-Sharing Coalitions in Village Economies," Working Papers hal-04247501, HAL.
  • Handle: RePEc:hal:wpaper:hal-04247501
    DOI: 10.2139/ssrn.4408595
    Note: View the original document on HAL open archive server: https://hal.science/hal-04247501
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    More about this item

    Keywords

    Risk Sharing; Informal Insurance; Group Formation; Social Control; Risk Heterogeneity; Homophily; Dyadic Models; Thailand;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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