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Incentive of risk sharing and trust formation: Experimental and survey evidence from Bangladesh

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  • Shoji, Masahiro

Abstract

Using data from a unique household survey and an artefactual field experiment conducted in rural Bangladesh, this study evaluates the impact on trust in community members of an incentive to maintain a risk-sharing arrangement between villagers. Risk sharing is a major opportunity for cooperation in rural economies, and the experience of cooperation could facilitate trust. In order to test this hypothesis, this study characterizes the incentive for risk sharing by the patterns of exogenous income shocks in the real world and risk preference, and trust in community members is elicited experimentally. The empirical results from dyadic regression demonstrate that villagers connected by a stronger incentive form higher level of trust. It is also found that villagers are more likely to share risks in villages that have stronger incentives. These findings suggest that the introduction of formal insurance, which reduces the incentive of risk sharing, could break down trust.

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  • Shoji, Masahiro, 2016. "Incentive of risk sharing and trust formation: Experimental and survey evidence from Bangladesh," MPRA Paper 71950, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:71950
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    References listed on IDEAS

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    Keywords

    Trust formation; risk sharing; experiment; Bangladesh;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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