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Do the poor benefit less from informal risk-sharing? Risk externalities and moral hazard in decentralized insurance arrangements


  • DELPIERRE Matthieu
  • VERHEYDEN Bertrand
  • WEYNANTS Stéphanie


Empirical evidence on developing countries highlights that poor farm-households are less keen to adopt high risk / high return technologies than rich households. Yet, they tend to be more vulnerable to income shocks than the rich. This paper develops a model of informal risk-sharing with endogenous risk-taking which provides a rationale for these observations. In our framework, informal risk-sharing is incomplete due to risk externalities, which leads to moral hazard. We compare the .rst best and second best to a decentralized bargaining process, where the lack of coordination moral hazard. The analysis of group composition yields counterintuitive results. First, if groups are homogeneous, poor groups share less risks than rich groups even though the rich take more risks. Second, the insurance level of rich households decreases in the presence of poor households, potentially making them reluctant to share risk with poorer households.

Suggested Citation

  • DELPIERRE Matthieu & VERHEYDEN Bertrand & WEYNANTS Stéphanie, 2014. "Do the poor benefit less from informal risk-sharing? Risk externalities and moral hazard in decentralized insurance arrangements," LISER Working Paper Series 2014-08, Luxembourg Institute of Socio-Economic Research (LISER).
  • Handle: RePEc:irs:cepswp:2014-08

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    Cited by:

    1. Delpierre, Matthieu & Verheyden, Bertrand & Weynants, Stéphanie, 2016. "Is informal risk-sharing less effective for the poor? Risk externalities and moral hazard in mutual insurance," Journal of Development Economics, Elsevier, vol. 118(C), pages 282-297.

    More about this item


    Risk-taking; Risk-sharing; Risk externality; Moral hazard;
    All these keywords.

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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