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Informal Insurance Arrangements in Village Economies

Author

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  • Ethan Ligon
  • Jonathan P. Thomas
  • Tim Worrall

Abstract

Recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income, thus rejecting the hypothesis of full risk-pooling. We attempt to explain these observations by adding limited commitment as an impediment to risk-pooling. We provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment, and test the model using data from from three Indian villages. We find that the model can fully explain the dynamic response of consumption to income, but that it fails to explain the distribution of consumption across households.

Suggested Citation

  • Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 1997. "Informal Insurance Arrangements in Village Economies," Keele Department of Economics Discussion Papers (1995-2001) 97/08, Department of Economics, Keele University, revised Oct 2000.
  • Handle: RePEc:kee:keeldp:97/08
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    References listed on IDEAS

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    1. Gauthier, C. & Poitevin, M., 1994. "Using Ex-ante Payments in Self-Enforcing Risk-Sharing Contracts," Cahiers de recherche 9402, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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    3. Rosenzweig, Mark R & Wolpin, Kenneth I, 1993. "Credit Market Constraints, Consumption Smoothing, and the Accumulation of Durable Production Assets in Low-Income Countries: Investment in Bullocks in India," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 223-244, April.
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    5. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-396, March.
    6. Ligon, Ethan, 1996. "Risk Sharing And Information: Theory And Measurement In Village Economies," CUDARE Working Papers 25091, University of California, Berkeley, Department of Agricultural and Resource Economics.
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    12. Andrew D. Foster & Mark R. Rosenzweig, 2001. "Imperfect Commitment, Altruism, And The Family: Evidence From Transfer Behavior In Low-Income Rural Areas," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 389-407, August.
    13. Coate, Stephen & Ravallion, Martin, 1993. "Reciprocity without commitment : Characterization and performance of informal insurance arrangements," Journal of Development Economics, Elsevier, vol. 40(1), pages 1-24, February.
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    More about this item

    Keywords

    Consumption smoothing; Informal insurance; Limited commitment; Village economies;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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