Informal Insurance in Social Networks

27 Pages Posted: 14 Dec 2005

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)

Francis Bloch

University of Angers - Research Group in Quantitative Saving (GREQAM); National Center for Scientific Research (CNRS)

Date Written: December 2004

Abstract

This paper studies bilateral insurance schemes across networks of individuals. While transfers are based on social norms, each individual must have the incentive to abide by those norms, and so we investigate the structure of stable insurance networks, in which self-enforcement constraints are satisfied. Network links play two distinct and possibly conflictual roles. First, they act as conduits for transfers. Second, they act as conduits for information. These features affect the scope for insurance, as well as the severity of punishments in the event of noncompliance.

Their interaction leads to a characterization of stable networks as networks which are suitably sparse, the degree of sparseness being related to the length of the minimal cycle that connects any triple of agents. As corollaries, we find that both thickly connected networks (such as the complete graph) and thinly connected networks (such as trees) are likely to be stable, whereas intermediate degrees of connectedness jeopardize stability. Finally, we study in more detail the notion of networks as conduits for transfers, by simply assuming a punishment structure (such as autarky) that is independent of the precise architecture of the network. This allows us to isolate a bottleneck effect: the presence of certain key agents who act as bridges for several transfers.

Bottlenecks are captured well in a feature of trees that we call decomposability, and we show that all decomposable networks have the same stability properties and that these are the least likely to be stable.

Keywords: social network, risk-sharing, reciprocity networks, norms, informal insurance

JEL Classification: D85, D80, 012, Z13

Suggested Citation

Genicot, Garance and Ray, Debraj and Bloch, Francis, Informal Insurance in Social Networks (December 2004). Available at SSRN: https://ssrn.com/abstract=869463 or http://dx.doi.org/10.2139/ssrn.869463

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

Francis Bloch

University of Angers - Research Group in Quantitative Saving (GREQAM) ( email )

Centre de la Vieille Charité
2, rue de la Charité
Marseille, 13002
France

National Center for Scientific Research (CNRS) ( email )

54, boulevard Raspail
Paris, 75006
France

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