EconPapers    
Economics at your fingertips  
 

Is informal risk-sharing less effective for the poor? Risk externalities and moral hazard in mutual insurance

Matthieu Delpierre, Bertrand Verheyden and Stéphanie Weynants

Journal of Development Economics, 2016, vol. 118, issue C, 282-297

Abstract: Poor farm-households are less keen to adopt high risk/high return technologies than rich households. Yet, the poor are more vulnerable to income shocks. We develop a model of endogenous risk-taking to explain these facts. In autarky, poor households adopt less risky production plans and obtain lower expected returns, but face higher relative risk than the rich. The introduction of risk-sharing generates negative risk externalities between agents. At the first best, the social planner imposes a homogeneous level of risk-taking in the group. At the second best, risk-taking is not enforceable and increases with insurance, generating moral hazard. Interestingly, the poor's risk-taking behavior is more sensitive to insurance. The social planner thus mitigates risk-taking by applying a lower insurance coverage in poor groups. The introduction of risk-sharing therefore reinforces the gap between rich and poor in terms of expected income and absolute risk, while the effect on relative risk is ambiguous.

Keywords: Risk-taking; Risk-sharing; Risk externality; Moral hazard; Wealth (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304387815001108
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:118:y:2016:i:c:p:282-297

DOI: 10.1016/j.jdeveco.2015.09.003

Access Statistics for this article

Journal of Development Economics is currently edited by M. R. Rosenzweig

More articles in Journal of Development Economics from Elsevier
Bibliographic data for series maintained by Haili He ().

 
Page updated 2021-02-26
Handle: RePEc:eee:deveco:v:118:y:2016:i:c:p:282-297