Investments in social ties, risk sharing and inequality

45 Pages Posted: 5 Nov 2014 Last revised: 20 Aug 2018

See all articles by Attila Ambrus

Attila Ambrus

Duke University - Department of Economics

Matthew Elliott

Cambridge University

Multiple version iconThere are 2 versions of this paper

Date Written: March 16, 2015

Abstract

This paper provides a framework to study the formation of risk-sharing networks through costly social investments, in particular the inefficiencies and resulting inequality associated with such processes. First, individuals invest in relationships to form a network. Next, neighboring agents negotiate risk-sharing arrangements. There is never underinvestment, but overinvestment is possible and we find a novel trade-off between efficiency and equality. The most stable efficient network also generates the most inequality. When the income correlation structure is generalized by splitting individuals into groups, such that incomes across groups are less correlated but these relationships are more costly, there can be underinvestment across group but not within group. We find that more central agents have better incentives to form across-group links, reaffirming the efficiency inequality trade-off. In general, endogenous network formation in the risk sharing context tends to result in highly asymmetric networks and stark inequalities in consumption levels.

Suggested Citation

Ambrus, Attila and Elliott, Matthew, Investments in social ties, risk sharing and inequality (March 16, 2015). Economic Research Initiatives at Duke (ERID) Working Paper No. 179. Available at SSRN: https://ssrn.com/abstract=2518618 or http://dx.doi.org/10.2139/ssrn.2518618

Attila Ambrus (Contact Author)

Duke University - Department of Economics ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Matthew Elliott

Cambridge University ( email )

Faculty of Economics
Austin Robinson Building Sidgwick Avenue
Cambridge, CB39DD
United Kingdom

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