Formal Insurance and Informal Risk Sharing Dynamics: The Role of Social Preferences

57 Pages Posted: 30 Apr 2015 Last revised: 6 Mar 2018

See all articles by Wanchuan Lin

Wanchuan Lin

Peking University - Guanghua School of Management

Juanjuan Meng

Peking University - Guanghua School of Management

Xi Weng

Peking University

Date Written: April 28, 2015

Abstract

The literature has mixed results on how formal insurance affects informal risk sharing. Whether such effect is motivated extrinsically or intrinsically also remains unclear. We design a lab experiment in which formal insurance is introduced and removed unexpected and the insurance purchase decisions are either voluntary or forced. We find, quite surprisingly, that informal risk sharing is significantly improved after the removal of formal insurance, primarily for subjects making asymmetric insurance take-up decisions voluntarily. Investigating the dynamics suggests that it is those who take the insurance acting first to share more risk for their partners. We propose a model based on a particular feature of social preferences, guilt aversion, to explain our findings.

Keywords: insurance, risk sharing, crowding-out, social preferences, guilt

JEL Classification: C91, D81, O17

Suggested Citation

Lin, Wanchuan and Meng, Juanjuan and Weng, Xi, Formal Insurance and Informal Risk Sharing Dynamics: The Role of Social Preferences (April 28, 2015). Available at SSRN: https://ssrn.com/abstract=2600280 or http://dx.doi.org/10.2139/ssrn.2600280

Wanchuan Lin

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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

Xi Weng

Peking University ( email )

Beijing, 100871
China

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