Informal Risk Sharing with Local Information

Attila Ambrus, Wayne Gao and Pau Milán

The Review of Economic Studies, 2022, vol. 89, issue 5, 2329-2380

Abstract: This article considers the effect of contracting limitations in risk-sharing networks, arising for example from observability, verifiability, complexity, or cultural constraints. We derive necessary and sufficient conditions for Pareto efficiency under these constraints in a general setting, and we provide an explicit characterization of Pareto efficient bilateral transfer profiles under CARA utility and normally distributed endowments. Our model predicts that network centrality is positively correlated with consumption volatility, as more central agents become quasi-insurance providers to more peripheral agents. The proposed framework has important implications for the empirical specification of risk-sharing tests, allowing for local risk-sharing groups that overlap within the village network.

Keywords: Social network; Risk sharing; Pareto efficiency; Local information; D11; D16; D85; L14; G52; O17 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:89:y:2022:i:5:p:2329-2380.

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