Consumption Risk-sharing in Social Networks

Consumption Risk-sharing in Social Networks

Attila Ambrus (), Markus Michael Mobius () and Adam Szeidl
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Attila Ambrus: Harvard University

No 79, Economics Working Papers from Institute for Advanced Study, School of Social Science

Abstract: We build a model of informal risk-sharing among agents organized in a social network. A connection between individuals serves as collateral that can be used to enforce insurance payments. We characterize incentive compatible risk-sharing arrangements for any network structure, and develop two main results. (1) Expansive networks, where every group of agents have a large number of links with the rest of the community relative to the size of the group, facilitate better risk-sharing. In particular, “two-dimensional” village networks organized by geography are sufficiently expansive to allow very good risk-sharing. (2) In second-best arrangements, agents organize in endogenous “risksharing islands” in the network, where shocks are shared fully within but imperfectly across islands. As a result, risk-sharing in second-best arrangements is local: socially closer agents insure each other more. In an application of the model, we explore the spillover effect of development aid on the consumption of non-treated individuals.

New Economics Papers: this item is included in nep-dev, nep-gth, nep-ias, nep-net, nep-soc and nep-ure
Date: 2007-11
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