Informal Risk Sharing with Local Information
111 Pages Posted: 13 Aug 2018
Date Written: July 25, 2018
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
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