Risk and Reciprocity Over the Mobile Phone Network: Evidence from Rwanda

37 Pages Posted: 24 Nov 2011  

Joshua Evan Blumenstock

University of California, Berkeley

Marcel Fafchamps

Stanford University - Freeman Spogli Institute for International Studies

Nathan Eagle

Santa Fe Institute

Date Written: October 2011

Abstract

A large literature describes how local risk sharing networks can help individuals smooth consumption in the face of idiosyncratic economic shocks. However, when an entire community faces a large covariate shock, and when the transaction costs of transfers are high, these risk sharing networks are likely to be less effective. In this paper, we document how a new technology – mobile phones – reduces transaction costs and enables Rwandans to share risk quickly over long distances. We examine a comprehensive database of person-to-person transfers of mobile airtime and find that individuals send this rudimentary form of “mobile money” to friends and family affected by natural disasters. Using the Lake Kivu earthquake of 2008 to identify the effect of a large covariate shock on interpersonal transfers, we estimate that a current-day earthquake would result in the transfer of between $22,000 and $30,000 to individuals living near the epicenter. We further show that the pattern of transfers is most consistent with a model of reciprocal risk sharing, where transfers are determined by past reciprocity and geographical proximity, rather than one of pure charity or altruism, in which transfers would be expected to be increasing in the wealth of the sender and decreasing in the wealth of the recipient.

Keywords: Risk Sharing, Mobile Phones, Mobile Money, Information and communications technologies, Development, Earthquakes, Rwanda, Africa

JEL Classification: O16, O17, O33

Suggested Citation

Blumenstock, Joshua Evan and Fafchamps, Marcel and Eagle, Nathan, Risk and Reciprocity Over the Mobile Phone Network: Evidence from Rwanda (October 2011). NET Institute Working Paper No. 11-25. Available at SSRN: https://ssrn.com/abstract=1958042 or http://dx.doi.org/10.2139/ssrn.1958042

Joshua Evan Blumenstock (Contact Author)

University of California, Berkeley ( email )

102 South Hall
Berkeley, CA 94720-4600
United States

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

Marcel Fafchamps

Stanford University - Freeman Spogli Institute for International Studies ( email )

Stanford, CA 94305
United States

Nathan Eagle

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States

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