Endogenous Group Formation in Risk-Sharing Arrangements

NYU Department of Economics Working Paper

33 Pages Posted: 6 Mar 2002

See all articles by Garance Genicot

Garance Genicot

Georgetown University - Department of Economics

Debraj Ray

New York University (NYU) - Department of Economics; Autonomous University of Barcelona - Instituto de Analisis Economico (CSIC)

Date Written: February 2002

Abstract

We study informal insurance within communities, explicitly recognizing the possibility that subgroups of individuals may destabilize insurance arrangements among the larger group. We therefore consider self-enforcing risk-sharing agreements that are robust not only to single-person deviations but also to potential deviations by subgroups. However, such deviations must be credible, in the sense that the subgroup must pass exactly the same test that we apply to the entire group; it must itself employ some self-enforcing risk-sharing agreement. We observe that the stability of subgroups is inimical to the stability of the group as a whole. Two surprising consequences of this analysis are that stable groups have (uniformly) bounded size, a result in sharp contrast to the individual-deviation problem, and that the degree of risk-sharing in a community is generally non-monotonic in the level of uncertainty or need for insurance in the community.

Keywords: Risk-Sharing, Insurance, Commitment, Coalition-proofness, Coalition, Groups

JEL Classification: C73 , O16 ,D81 , G22, E21

Suggested Citation

Genicot, Garance and Ray, Debraj, Endogenous Group Formation in Risk-Sharing Arrangements (February 2002). NYU Department of Economics Working Paper, Available at SSRN: https://ssrn.com/abstract=302343 or http://dx.doi.org/10.2139/ssrn.302343

Garance Genicot (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-7144 (Phone)
202-687-6102 (Fax)

HOME PAGE: http://www.georgetown.edu/faculty/gg58

Debraj Ray

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10003
United States
212-998-8906 (Phone)
212-995-4186 (Fax)

Autonomous University of Barcelona - Instituto de Analisis Economico (CSIC)

Campus UAB
E-08193 Bellaterra
Spain

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