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The Formation of Risk Sharing Networks

  • Marcel Fafchamps
  • Flore Gubert

This paper examines the endogenous formation of risk sharing networks in the rural Philippines. We show that geographic proximity is a major determinant of interpersonal relationships. We find little evidence that people form relationships to pool income risk. The existence of a pre-existing relationship between two individuals is a major determinant of subsequent gifts and informal loans between them, controlling for other proximity factors. From this we conclude that these transfers and informal loans are embedded in interpersonal relationships. These relationships are largely determined by proximity factors and are only weakly the result of purposeful diversification of income risk. There is, however, some evidence that the formation of risk sharing links is aimed at pooling health risk. The paper also makes a methodological contribution to the estimation of dyadic models.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number GPRG-WPS-037.

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Date of creation: 01 Dec 2005
Date of revision:
Handle: RePEc:oxf:wpaper:gprg-wps-037
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  31. Udry, Christopher, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 495-526, July.
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