Formal Insurance, Risk Sharing, and the Dynamics of Other-Regarding Preferences

46 Pages Posted: 18 Jan 2018

See all articles by Hanna Freudenreich

Hanna Freudenreich

University of Goettingen (Göttingen) - Department of Agricultural Economics & RuralDevelopment

Marcela Ibanez

University of Goettingen

Stephan Dietrich

UNU-MERIT

Oliver Musshoff

Humboldt University of Berlin - Department of Agricultural Economics and Social Sciences

Date Written: October 26, 2017

Abstract

In the absence of formal financial markets, many poor households rely on risk sharing networks to protect themselves against adverse events. In this paper we present a model that explains the impact of formal insurance on informal risk sharing and, subsequently, the dynamics of other-regarding preferences. We use a field experiment to test the predictions of the model with rural households in Mexico. Consistent with the model predictions, we find that when shocks are collective, there is a crowding-out effect on transfers and a decrease in trust on insured participants. However, when shocks are idiosyncratic, we fail to confirm the predictions of the model. Transfers to non-insured members are significantly higher when insurance is available to some of the network members than in a control treatment when insurance is not available. This unexpected crowding-in effect on transfers leads to an increase in trust among non-insured participants. These findings suggest that there is a need to find optimal insurance designs that minimizes the crowding-out effect of formal insurance on informal risk sharing and other-regarding preferences.

Suggested Citation

Freudenreich, Hanna and Ibanez, Marcela and Dietrich, Stephan and Musshoff, Oliver, Formal Insurance, Risk Sharing, and the Dynamics of Other-Regarding Preferences (October 26, 2017). Available at SSRN: https://ssrn.com/abstract=3100388 or http://dx.doi.org/10.2139/ssrn.3100388

Hanna Freudenreich

University of Goettingen (Göttingen) - Department of Agricultural Economics & RuralDevelopment ( email )

Platz der Göttinger Sieben 5
Göttingen, D-37073
Germany

Marcela Ibanez (Contact Author)

University of Goettingen ( email )

Platz der Goettinger Sieben 5
Office 8-134
Goettingen, 37073
Germany

Stephan Dietrich

UNU-MERIT ( email )

Maastricht
Netherlands

Oliver Musshoff

Humboldt University of Berlin - Department of Agricultural Economics and Social Sciences ( email )

Berlin, D-10099
Germany

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