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Consumption Risk-sharing in Social Networks

  • Attila Ambrus
  • Markus Mobius
  • Adam Szeidl

We develop a model of informal risk-sharing in social networks, where relationships between individuals can be used as social collateral to enforce insurance payments. We characterize incentive compatible risk-sharing arrangements and obtain two results. (1) The degree of informal insurance is governed by the expansiveness of the network, measured by the number of connections that groups of agents have with the rest of the community, relative to group size. Two-dimensional networks, where people have connections in multiple directions, are sufficiently expansive to allow very good risk-sharing. We show that social networks in Peruvian villages satisfy this dimensionality property; thus, our model can explain Townsend's (1994) puzzling observation that village communities often exhibit close to full insurance. (2) In second-best arrangements, agents organize in endogenous "risk-sharing islands" in the network, where shocks are shared fully within, but imperfectly across islands. As a result, network based risk-sharing is local: socially closer agents insure each other more.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15719.

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Date of creation: Feb 2010
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Publication status: published as Ambrus A, Mobius M, Szeidl A. Consumption Risk-sharing in Social Networks. American Economic Review. 2014;104(1):149-82.
Handle: RePEc:nbr:nberwo:15719
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