Consumption Risk-Sharing in Social Networks
Attila Ambrus, Markus Mobius, Adam Szeidl
American Economic Review · 2014 · Volume 104 · Issue 1
Abstract
We develop a model in which connections between individuals serve as social collateral to enforce informal insurance payments. We show that: (i) The degree of insurance is governed by the expansiveness of the network, measured with the per capita number of connections that groups have with the rest of the community. "Two-dimensional" networks—like real-world networks in Peruvian villages—are sufficiently expansive to allow very good risk-sharing. (ii) In second- best arrangements, insurance is local: agents fully share shocks within, but imperfectly between endogenously emerging risk-sharing groups. We also discuss how endogenous social collateral affects our results.
Keywords
Network Formation and Analysis: Theory, Insurance, Insurance Companies, Actuarial Studies, Economic Development: Human Resources, Human Development, Income Distribution, Migration, Formal and Informal Sectors, Shadow Economy, Institutional Arrangements, Economic Sociology, Economic Anthropology, Social and Economic Stratification
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