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Social Investments, Informal Risk Sharing, and Inequality

Matthew Elliott, Arun Chandrasekhar and Attila Ambrus
Additional contact information
Matthew Elliott: Caltech
Arun Chandrasekhar: Stanford
Attila Ambrus: Duke University

No 189, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies costly network formation in the context of risk sharing. Neighboring agents negotiate agreements as in Stole and Zwiebel (1996), which results in the social surplus being allocated according to the Myerson value. We uncover two types of inefficiency: overinvestment in social relationships within group (e.g., caste, ethnicity), but underinvestment across group. We find a novel tradeoff between efficiency and equality. Both within and across groups, inefficiencies are minimized by increasing social inequality, which results in financial inequality and increasing the centrality of the most central agents. Evidence from 75 Indian village networks is congruent with our model.

Date: 2015
New Economics Papers: this item is included in nep-net and nep-ure
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Citations: View citations in EconPapers (5)

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