Risk Sharing, Informal Networks and Living Arrangements

We analyze a model in which agents endogenously decide whether to locate close to other members of the extended family, as opposed to different cities or states. The agents' decisions are affected by several factors including the nature of the shock process affecting incomes, initial wealth, attitudes towards risk, and reliance on informal networks for information sharing and referrals about jobs. In equilibrium, the model predicts that individuals with higher initial wealth, lower risk aversion, or less volatile incomes will tend to locate further away from their immediate family, all else equal. Using data from the National Survey of Families and Households and the PSID, we document differential spatial patterns in living arrangements by race, income processes, wealth and risk aversion, and offer a decomposition of these differentials into the portions attributable to the different factors considered in our model.