Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies

41 Pages Posted: 6 Mar 2011

See all articles by Ethan A. Ligon

Ethan A. Ligon

University of California, Berkeley; Giannini Foundation

Tim S. Worrall

University of Edinburgh

Jonathan Thomas

University of Edinburgh - Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 16, 2000

Abstract

Recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income, thus rejecting the hypothesis of full risk-pooling. We attempt to explain these observations by adding limited commitment as an impediment to risk-pooling. We provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment, and test the model using data from from three Indian villages. We find that the model can fully explain the dynamic response of consumption to income, but that it fails to explain the distribution of consumption across households.

Suggested Citation

Ligon, Ethan A. and Worrall, Tim S. and Thomas, Jonathan P., Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies (October 16, 2000). Available at SSRN: https://ssrn.com/abstract=1776648 or http://dx.doi.org/10.2139/ssrn.1776648

Ethan A. Ligon (Contact Author)

University of California, Berkeley ( email )

207 Giannini Hall #3310
Berkeley, CA 94720-3310
United States

Giannini Foundation

UC Davis
Davis, CA 95616
United States

Tim S. Worrall

University of Edinburgh ( email )

30 Buccleuch Place
Edinburgh, Scotland EH8 9JY
United Kingdom
(0)131 651 5128 (Phone)

HOME PAGE: http://www.timworrall.com

Jonathan P. Thomas

University of Edinburgh - Economics ( email )

50 George Square
Edinburgh, EH8 9JY, Scotland
United Kingdom
+44 131 650 4515 (Phone)
+44 131 650 4514 (Fax)

HOME PAGE: http://www.st-andrews.ac.uk/~jpt/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

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