Do the poor benefit less from informal risk-sharing? Risk externalities and moral hazard in decentralized insurance arrangements

Matthieu Delpierre, Bertrand Verheyden and Stéphanie Weynants

No 2014-08, LISER Working Paper Series from Luxembourg Institute of Socio-Economic Research (LISER)

Abstract: Empirical evidence on developing countries highlights that poor farm-households are less keen to adopt high risk / high return technologies than rich households. Yet, they tend to be more vulnerable to income shocks than the rich. This paper develops a model of informal risk-sharing with endogenous risk-taking which provides a rationale for these observations. In our framework, informal risk-sharing is incomplete due to risk externalities, which leads to moral hazard. We compare the .rst best and second best to a decentralized bargaining process, where the lack of coordination ampli.es moral hazard. The analysis of group composition yields counterintuitive results. First, if groups are homogeneous, poor groups share less risks than rich groups even though the rich take more risks. Second, the insurance level of rich households decreases in the presence of poor households, potentially making them reluctant to share risk with poorer households.

Keywords: Risk-taking; Risk-sharing; Risk externality; Moral hazard (search for similar items in EconPapers)
JEL-codes: O12 O13 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2014-06
New Economics Papers: this item is included in nep-agr, nep-cta and nep-ias
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Citations: View citations in EconPapers (1)

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