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Risk-Sharing Networks

  • Yann Bramoullé
  • Rachel Kranon

This paper considers the formation of risk-sharing networks. Following empirical findings, we build a model where risk-sharing takes place between pairs of individuals. We ask what structures emerge when pairs can agree to form links, but people cannot coordinate links across a population. We consider a benchmark model where identical individuals commit to share their monetary holdings equally with linked partners. We compare efficient networks to equilibrium networks. Efficient networks can (indirectly) connect all individuals and involve full insurance. However, equilibrium networks connect fewer individuals. There is an externality: when breaking a link individuals do not take into account the negative effect on others distant in the network. The network formation process can lead identical individuals to be in different positions and thus have different risk-sharing outcomes. These results may help explain empirical findings that risk-sharing is often not symmetric or complete.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0526.

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Date of creation: 2005
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Handle: RePEc:lvl:lacicr:0526
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  1. Stefan Dercon & Joachim De Weerdt, 2002. "Risk-sharing Networks and Insurance against illness," Economics Series Working Papers WPS/2002-16, University of Oxford, Department of Economics.
  2. Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Coate, S. & Ravallion, M., 1989. "Reciprocity Without Commitment: Characterization and Performance of Informal Risk-Sharing Arrangements," Papers 96, Warwick - Development Economics Research Centre.
  4. de Janvry, Alain & Sadoulet, Elisabeth & Winters, Paul C. & Murgai, Rinku, 2000. "Localized and Incomplete Mutual Insurance," Working Papers 12905, University of New England, School of Economics.
  5. Francis Bloch & Garance Genicot, 2005. "Informal Insurance in Social Networks," 2005 Meeting Papers 156, Society for Economic Dynamics.
    • Francis Bloch (GREQAM and Universite de la Mediterranee), Garance Genicot (Georgetown University, and Debraj Ray (New York University and Instituto de Analisis Economico (CSIC)), 2004. "Informal Insurance in Social Networks," Working Papers gueconwpa~04-04-16, Georgetown University, Department of Economics.
  6. Kimball, Miles S, 1988. "Farmers' Cooperatives as Behavior Toward Risk," American Economic Review, American Economic Association, vol. 78(1), pages 224-32, March.
  7. Kirman, Alan, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 137-56, February.
  8. De Weerdt, Joachim & Dercon, Stefan, 2006. "Risk-sharing networks and insurance against illness," Journal of Development Economics, Elsevier, vol. 81(2), pages 337-356, December.
  9. Garance Genicot & Debraj Ray, 2003. "Group Formation in Risk--Sharing Arrangements," Review of Economic Studies, Wiley Blackwell, vol. 70(1), pages 87-113, January.
  10. Marcel Fafchamps & Susan Lund, . "Risk Sharing Networks in Rural Philippines," Working Papers 97014, Stanford University, Department of Economics.
  11. Jackson, Matthew O. & Watts, Alison, 2002. "The Evolution of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 106(2), pages 265-295, October.
  12. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-91, May.
  13. Udry, Christopher, 1995. "Risk and Saving in Northern Nigeria," American Economic Review, American Economic Association, vol. 85(5), pages 1287-1300, December.
  14. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
  15. Rosenzweig, Mark R. & Stark, Oded, 1987. "Consumption Smoothing, Migration and Marriage: Evidence from Rural India," Bulletins 7515, University of Minnesota, Economic Development Center.
  16. 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.
  17. De Weerdt, Joachim, 2002. "Risk-Sharing and Endogenous Network Formation," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  18. Marcel Fafchamps & Susan Lund, 2000. "Risk-Sharing Networks in Rural Philippines," Economics Series Working Papers 10, University of Oxford, Department of Economics.
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