Informal Insurance Arrangements in Village EconomiesEthan Ligon (), Jonathan Thomas () and Tim Worrall () CRIEFF Discussion Papers from Centre for Research into Industry, Enterprise, Finance and the Firm Abstract: This paper studies insurance arrangements in village economies when there is complete information but limited commitment. Commitment is limited because only limited penalties can be imposed on households which renege on their promises. Any efficient insurance arrangements must therefore take into account that households will renege if the benefits from doing so outweigh the costs. We study a general model which admits aggregate and idiosyncratic risk as well as serial correlation of incomes. It is shown that in the case of two households and no storage the efficient insurance arrangement is characterized by a simple updating rule. An example illustrates the similarity of the efficient arrangement to a simple debt contract with occasional debt forgiveness. The model is then extended to multiple households in southern India to test the theory against three alternative models: autarky, full insurance, and a static model of limited commitment due to Coate and Ravaillon (1993). Overall, the model we develop does a significantly better job of explaining the data than does any of these alternatives. Keywords: Village economy; efficient insurance; limited commitment (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: http://EconPapers.repec.org/RePEc:san:crieff:9705 Access Statistics for this paper More papers in CRIEFF Discussion Papers from Centre for Research into Industry, Enterprise, Finance and the Firm |
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