Limited Commitment, Social Control and Risk-Sharing Coalitions in Village Economies

Fernando Jaramillo, Juan Daniel Hernández, Hubert Kempf (), Fabien Moizeau and Thomas Vendryes
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Fernando Jaramillo: Universidad del Rosario [Bogota]

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Abstract: The need to insure against idiosyncratic income risk leads to the formation of risksharing groups in village economies where formal financial markets are absent. We develop a theoretical model to address the impact of limited commitment and social control on the extent of informal risk sharing when agents are induced to form such risk-sharing coalitions. Social control increases the prospect of future punishment of present defectors and thus mitigates the absence of commitment. A defection-proof core-partition exists, is unique and homophilic. Riskier societies may not be more segmented and may not pay a higher cost for insurance. A higher social control leads to a less segmented society but does not necessarily lead to a lower price for sharing risk. We provide evidence, based on data on Thai villages, that consumption smoothing conforms with our theoretical result of homophily-based coalitions and that social control contributes to a lesser segmentation of a society.

Keywords: Risk Sharing; Informal Insurance; Group Formation; Social Control; Risk Heterogeneity; Homophily; Dyadic Models; Thailand (search for similar items in EconPapers)
Date: 2023
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Working Paper: Limited Commitment, Social Control and Risk-Sharing Coalitions in Village Economies (2023)
Working Paper: Limited Commitment, Social Control and Risk-Sharing Coalitions in Village Economies (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-04247501

DOI: 10.2139/ssrn.4408595

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