Insurance and Propagation in Village Networks

70 Pages Posted: 16 Nov 2020

See all articles by Cynthia Kinnan

Cynthia Kinnan

Northwestern University - Department of Economics

Krislert Samphantharak

University of California, San Diego - School of Global Policy and Strategy

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

Diego Vera Cossio

Inter-American Development Bank

Date Written: November 2020

Abstract

In village economies, insurance networks are key to smoothing shocks, while production networks can propagate them. The interplay of these networks is crucial. We show that a significant health expenditure shock to one household propagates to other linked households via supply-chain and labor networks. Imperfectly insured households adjust production decisions---cutting input spending and reducing labor hiring---affecting households with whom they trade inputs and labor. Household businesses proximate to shocked households in the supply chain network experience reduced local sales, and those proximate in the labor network experience a lower probability of working locally. As a result, indirectly shocked households’ earnings and consumption fall. These declines persist over several years because networks are rigid: households appear unable to form new linkages when existing links experience negative shocks. Propagation is a function of access to insurance networks: well-insured households do not cut spending when hit by shocks, leading to minimal propagation. A simple back-of-the-envelope exercise suggests that the total magnitude of indirect effects may be larger than the direct effects and that social (village-level) gains from expanding safety nets such as health insurance may be substantially higher than private (household-level) gains.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Kinnan, Cynthia and Samphantharak, Krislert and Townsend, Robert M. and Vera Cossio, Diego, Insurance and Propagation in Village Networks (November 2020). NBER Working Paper No. w28089, Available at SSRN: https://ssrn.com/abstract=3731258

Cynthia Kinnan (Contact Author)

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

Krislert Samphantharak

University of California, San Diego - School of Global Policy and Strategy ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States
858-534-3939 (Fax)

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Diego Vera Cossio

Inter-American Development Bank

1300 New York Ave NW
Washington, DC 20577
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
34
PlumX Metrics