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Does informal risk sharing induce lower efforts? Evidence from lab-in-the-field experiments in rural Mexico

Author

Listed:
  • Alger, Ingela
  • Juarez, Laura
  • Juarez-Torres, Miriam
  • Miquel-Florensa, Josepa

Abstract

How does informal risk sharing affect incentives to avoid risk? While moral hazard is expected under formal insurance, theory suggests that the incentive effects of informal risk sharing are ambiguous: internalization of the external effects of transfers on others may reduce or enhance incentives to avoid risk. To study this issue, which is particularly relevant for developing economies, we designed a novel real-effort lab experiment and conducted it in 16 small villages in rural Mexico. We find that subjects internalize the effects of transfers enough for the presence of transfers to significantly increase effort compared to autarky situations.

Suggested Citation

  • Alger, Ingela & Juarez, Laura & Juarez-Torres, Miriam & Miquel-Florensa, Josepa, 2016. "Does informal risk sharing induce lower efforts? Evidence from lab-in-the-field experiments in rural Mexico," IAST Working Papers 16-34, Institute for Advanced Study in Toulouse (IAST), revised Oct 2016.
  • Handle: RePEc:tse:iastwp:30163
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    References listed on IDEAS

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    More about this item

    Keywords

    informal insurance; effort; moral hazard; free-riding effect; empathy effect;

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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