Informal Risk Sharing with Local Information

111 Pages Posted: 13 Aug 2018

See all articles by Attila Ambrus

Attila Ambrus

Duke University - Department of Economics

Wayne Yuan Gao

Yale University, Faculty of Arts & Sciences, Department of Economics

Pau Milan

Universitat Autònoma de Barcelona; Barcelona Graduate School of Economics; MOVE (Markets, Organizations and Votes in Economics)

Date Written: July 25, 2018

Abstract

This paper considers the effect of contracting limitations in risk-sharing networks, arising for example from observability, verifiability, complexity or cultural constraints. We derive necessary and sufficient conditions for Pareto efficiency under these constraints in a general setting, and provide an explicit characterization of Pareto efficient arrangements under CARA utilities and normally distributed endowments. Contrary to other models, individuals with higher centralities become quasi-insurance providers to more peripheral individuals in our model. We show that network centrality is positively correlated with consumption volatility and we test this prediction using data on rural villages in Thailand.

Keywords: Social Network, Risk Sharing, Pareto Efficiency, Local Information

Suggested Citation

Ambrus, Attila and Gao, Wayne and Milan, Pau, Informal Risk Sharing with Local Information (July 25, 2018). Available at SSRN: https://ssrn.com/abstract=3220524 or http://dx.doi.org/10.2139/ssrn.3220524

Attila Ambrus

Duke University - Department of Economics ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Wayne Gao (Contact Author)

Yale University, Faculty of Arts & Sciences, Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06511
United States

HOME PAGE: http://ming-li.net

Pau Milan

Universitat Autònoma de Barcelona ( email )

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
Spain

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

MOVE (Markets, Organizations and Votes in Economics) ( email )

Campus de Bellaterra-UAB Edifici B (s/n)
EDIFICI B
Cerdanyola del Vallès
, Barcelona 08193
Spain

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