Investments in social ties, risk sharing and inequality

53 Pages Posted: 5 Nov 2014 Last revised: 25 Sep 2020

See all articles by Attila Ambrus

Attila Ambrus

Duke University - Department of Economics

Matthew Elliott

Cambridge University

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Date Written: September 13, 2020

Abstract

This paper investigates stable and efficient networks in the context of risk sharing, when it is costly to establish and maintain relationships that facilitate risk sharing. We find a novel trade-off between efficiency and equality: The most stable efficient networks also generate the most inequality. We then suppose that individuals can be split into groups, assuming that incomes across groups are less correlated than within a group but relationships across groups are more costly to form. The tension between efficiency and equality extends to these correlated income structures. More-central agents have stronger incentives to form across-group links, reaffirming the efficiency benefits of having highly central agents. Our results are robust to many extensions. In general, endogenously formed networks in the risk-sharing context tend to exhibit highly asymmetric structures, which can lead to stark inequalities in consumption levels.

Suggested Citation

Ambrus, Attila and Elliott, Matthew, Investments in social ties, risk sharing and inequality (September 13, 2020). 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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