Informal Insurance Arrangements in Village Economies

Ethan Ligon, Jonathan Thomas and Timothy Worrall

Keele Department of Economics Discussion Papers (1995-2001) from Department of Economics, Keele University

Abstract: Recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income, thus rejecting the hypothesis of full risk-pooling. We attempt to explain these observations by adding limited commitment as an impediment to risk-pooling. We provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment, and test the model using data from from three Indian villages. We find that the model can fully explain the dynamic response of consumption to income, but that it fails to explain the distribution of consumption across households.

Keywords: Consumption smoothing; Informal insurance; Limited commitment; Village economies (search for similar items in EconPapers)
JEL-codes: D80 G22 O12 (search for similar items in EconPapers)
Date: 1997, Revised 2000-10
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Published in Review of Economic Studies, Volume 69, January, 2002, pages 209-244.

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