The Crowding-Out Effect of Formal Insurance on Informal Risk Sharing: An Experimental Study

65 Pages Posted: 3 Oct 2011 Last revised: 23 Apr 2014

See all articles by Wanchuan Lin

Wanchuan Lin

Peking University - Guanghua School of Management

Yiming Liu

University of Pittsburgh - Department of Economics

Juanjuan Meng

Peking University - Guanghua School of Management

Date Written: April 23, 2014

Abstract

This paper investigates the crowding-out effect of formal insurance on informal risk-sharing arrangements via theory and laboratory experiment. Our model and simulation predict that the crowding out of private transfers is often more than one-for-one and will reduce the total risk coverage. Furthermore, the existence of a moderate degree of altruism exaggerates the crowding-out effect, especially when there is an ex-ante income inequality. These predictions are mostly supported by the laboratory experiment, except that the crowding-out effect is not more than one-for-one, and hence the total risk coverage is not significantly reduced by formal insurance.

Keywords: informal risk sharing, formal insurance, crowding-out effect

JEL Classification: C91, D81, O17

Suggested Citation

Lin, Wanchuan and Liu, Yiming and Meng, Juanjuan, The Crowding-Out Effect of Formal Insurance on Informal Risk Sharing: An Experimental Study (April 23, 2014). Available at SSRN: https://ssrn.com/abstract=1937514 or http://dx.doi.org/10.2139/ssrn.1937514

Wanchuan Lin

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Yiming Liu

University of Pittsburgh - Department of Economics ( email )

4901 Wesley Posvar Hall
230 South Bouquet Street
Pittsburgh, PA 15260
United States

Juanjuan Meng (Contact Author)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

HOME PAGE: http://www.gsm.pku.edu.cn/faculty_and_research/en/en_teacherDetail.html?crmurl=http://crm.gsm.pku.ed

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