Investments in social ties, risk sharing and inequality

86 Pages Posted: 5 Nov 2014 Last revised: 11 May 2020

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 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. The result extends to correlated income structures with individuals split into groups, such that incomes across groups are less correlated but these relationships are more costly. We find that more central agents have better incentives to form across-group links, reaffirming the efficiency benefits of having highly central agents and thus the efficiency inequality trade-off. Our results are robust to many extensions. In general, endogenously formed networks in the risk sharing context tend to exhibit highly asymmetric structures, 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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