Network-Constrained Risk Sharing in Village Economies

Pau Milán
Authors registered in the RePEc Author Service: Pau Milán

No 912, Working Papers from Barcelona School of Economics

Abstract: In this paper I investigate mutual insurance arrangements restricted on a social network. My approach solves for Pareto-optimal sharing rules in a situation where exchanges are limited within a given social network. I provide a formal description of the sharing rule between any pair of linked households as a function of their network position. I test the theory on a unique data set of indigenous villages in the Bolivian Amazon, during the years 2004 to 2009. I find that the observed exchanges across families match the network-based sharing rule, and that the theory can account for the deviation from full insurance observed in the data. I argue that this framework provides a reinterpretation of the standard risk sharing results, predicting household heterogeneity in response to income shocks. I show that this network-based variation in consumption behavior is borne out in the data, and that it can be interpreted economically in terms of consumption volatility.

Keywords: networks; risk sharing; development; informal credit; mutual insurance; consumption smoothing; Tsimane; village economies (search for similar items in EconPapers)
JEL-codes: D12 D61 D85 O1 O12 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-agr, nep-ias and nep-net
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Citations: View citations in EconPapers (1)

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