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Risk Pooling, Commitment, and Information: An experimental test of two fundamental assumptions

  • Abigail Barr

    (Centre for the Study of African Economies)

This paper presents rigorous and direct tests of two assumptions relating to limited commitment and asymmetric information that current underpin current models of risk pooling. A specially designed economic experiment involving 678 subjects across 23 Zimbabwean villages is used to solve the problems of observability and quantification that have frustrated previous attempts to conduct such tests. I find that more extrinsic commitment is associated with more risk pooling, but that more information is associated with less risk pooling.The first of these results accords with our expectations and assumptions.The second does not. I offer two explanations as to the origin of the second result and discuss their implications for how we view the assumptions made elsewhere in the literature. I also conduct a test of the relevance or external validity of the experimental results to our understanding of real risk pooling behaviour. In four out of the five villages for which the test could be conducted the networks of risk pooling contracts constructed during the experiment and the networks existing in real life were significantly correlated.

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File URL: http://128.118.178.162/eps/dev/papers/0409/0409030.pdf
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Paper provided by EconWPA in its series Development and Comp Systems with number 0409030.

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Length: 29 pages
Date of creation: 23 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpdc:0409030
Note: Type of Document - pdf; pages: 29
Contact details of provider: Web page: http://128.118.178.162

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  1. Ligon, Ethan, 1998. "Risk Sharing and Information in Village Economics," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 847-64, October.
  2. Hans Binswanger, 1980. "Attitudes toward risk: Experimental measurement in rural india," Artefactual Field Experiments 00009, The Field Experiments Website.
  3. Samuel Bowles & Herbert Gintis, 1998. "Mutual Monitoring in Teams: The Effects of Residual Claimancy and Reciprocity," Research in Economics 98-08-074e, Santa Fe Institute.
  4. Marcel Fafchamps & Susan Lund, . "Risk Sharing Networks in Rural Philippines," Working Papers 97014, Stanford University, Department of Economics.
  5. Holzmann, Robert & Packard, Truman & Cuesta, Jose, 2000. "Extending coverage in multi-pillar pension systems : constraints and hypotheses, preliminary evidence and future research agenda," Social Protection Discussion Papers 21303, The World Bank.
  6. Posner, Richard A. & Rasmusen, Eric B., 1999. "Creating and enforcing norms, with special reference to sanctions1," International Review of Law and Economics, Elsevier, vol. 19(3), pages 369-382, September.
  7. Cleve Willis & John Stranlund & Juan-Camilo Cardenas, 2000. "Local environmental control and institutional crowding-out," Artefactual Field Experiments 00028, The Field Experiments Website.
  8. Rosenzweig, Mark R. & Stark, Oded, 1987. "Consumption Smoothing, Migration and Marriage: Evidence from Rural India," Bulletins 7515, University of Minnesota, Economic Development Center.
  9. Iris Bohnet & Bruno S. Frey & Steffen Huck, . "More Order with Less Law: On Contract Enforcement, Trust, and Crowding," IEW - Working Papers 052, Institute for Empirical Research in Economics - University of Zurich.
  10. Grimard, Franque, 1997. "Household consumption smoothing through ethnic ties: evidence from Cote d'Ivoire," Journal of Development Economics, Elsevier, vol. 53(2), pages 391-422, August.
  11. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
  12. Ravallion, Martin & Dearden, Lorraine, 1988. "Social Security in a "Moral Economy": An Empirical Analysis for Java," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 36-44, February.
  13. Richard Posner & Eric Rasmusen, 1999. "Creating and Enforcing Norms, With Special Reference to Sanctions," Law and Economics 9907004, EconWPA.
  14. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, vol. 68(5), pages 1181-1230, September.
  15. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
  16. 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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