Consumption Risk-Sharing in Social Networks

67 Pages Posted: 8 Feb 2010

See all articles by Attila Ambrus

Attila Ambrus

Duke University - Department of Economics

Markus M. Mobius

Microsoft Corporation - Microsoft Research New England; University of Michigan at Ann Arbor - School of Information; National Bureau of Economic Research (NBER)

Adam Szeidl

Central European University

Date Written: February 2010

Abstract

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.

Suggested Citation

Ambrus, Attila and Mobius, Markus M. and Szeidl, Adam, Consumption Risk-Sharing in Social Networks (February 2010). NBER Working Paper No. w15719. Available at SSRN: https://ssrn.com/abstract=1548777

Attila Ambrus (Contact Author)

Duke University - Department of Economics ( email )

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Markus M. Mobius

Microsoft Corporation - Microsoft Research New England ( email )

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HOME PAGE: http://www.markusmobius.org

University of Michigan at Ann Arbor - School of Information ( email )

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HOME PAGE: http://www.markusmobius.org

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

HOME PAGE: http://www.markusmobius.org

Adam Szeidl

Central European University ( email )

Nador u. 9.
Budapest H-1051
Hungary
+36 1 327 3000 (Phone)
+36 1 327 3232 (Fax)

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