Formal Markets and Informal Insurance

Abstract

“Contractual interlinkages” in the rural communities of developing countries may be a key element of informal insurance when information is incomplete, and may influence the evolution of the distribution of resources. The introduction of “modern” credit markets may undermine these interlinkages, and consequently limit the usefulness of informal insurance. Using data which assigns households in a transitional Indian village to either a “modern” or “traditional” regime, we examine differences in financial transactions across these regimes. Traditional hoseholds receive more frequent “in-kind” transfers of food and clothing, While also more frequently making “in-kind” payments of crop output to others in the village.