Consumption Risk-sharing in Social Networks / Attila Ambrus, Markus Mobius, Adam Szeidl.

Format:

Book

Author/Creator:

Ambrus, Attila.

Contributor:

National Bureau of Economic Research.

Mobius, Markus.

Szeidl, Adam.

Series:

Working Paper Series (National Bureau of Economic Research) no. w15719.

NBER working paper series no. w15719

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

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.

Notes:

Print version record

February 2010.