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Formal insurance and altruism networks

Tizié Bene (), Yann Bramoullé () and Frédéric Deroïan ()
Additional contact information
Tizié Bene: Aix-Marseille Univ, CNRS, AMSE, Marseille, France, https://www.amse-aixmarseille.fr/en/members/bene
Frédéric Deroïan: Aix-Marseille Univ, CNRS, AMSE, Marseille, France, https://www.amse-aixmarseille.fr/en/members/deroian

No 2140, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: We study how altruism networks affect the adoption of formal insurance. Agents have private CARA utilities and are embedded in a network of altruistic relationships. Incomes are subject to both a common shock and a large idiosyncratic shock. Agents can adopt formal insurance to cover the common shock. We show that ex-post altruistic transfers induce interdependence in ex-ante adoption decisions. We characterize the Nash equilibria of the insurance adoption game. We show that adoption decisions are substitutes and that the number of adopters is unique in equilibrium. The demand for formal insurance is lower with altruism than without at low prices, but higher at high prices. Remarkably, individual incentives are aligned with social welfare. We extend our analysis to CRRA utilities and to a fixed utility cost of adoption.

Keywords: formal insurance; informal transfers; altruism networks (search for similar items in EconPapers)
JEL-codes: C72 D85 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2021-09
New Economics Papers: this item is included in nep-gth, nep-ias, nep-iue, nep-mic, nep-net, nep-ore, nep-soc and nep-upt
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