Consumption risk-sharing in social networks
By: Attila Ambrus, Markus Mobius, Adam Szeidl.
Contributors: Mobius, Markus, 1971-; Szeidl, Adam.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 15719; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 15719.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "We develop a model of informal risk-sharing in social networks, where relationships between individuals can be used as social collateral to enforce insurance payments.  We characterize incentive compatible risk-sharing arrangements and obtain two results.  (1) The degree of informal insurance is governed by the expansiveness of the network, measured by the number of connections that groups of agents have with the rest of the community, relative to group size.  Two-dimensional networks, where people have connections in multiple directions, are sufficiently expansive to allow very good risk-sharing.  We show that social networks in Peruvian villages satisfy this dimensionality property; thus, our model can explain Townsend's (1994) puzzling observation that village communities often exhibit close to full insurance.  (2) In second-best arrangements, agents organize in endogenous "risk-sharing islands" in the network, where shocks are shared fully within, but imperfectly across islands.  As a result, network based risk-sharing is local: socially closer agents insure each other more"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 3/9/2010.

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