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Informal Insurance with Endogenous Group Size

Stephanie Weynants ()
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Stephanie Weynants: Earth and Life Institute, Universite Catholique de Louvain

No 1107, Working Papers from University of Namur, Department of Economics

Abstract: We present a theory of endogenous formation of insurance groups which combines heterogeneity on agents' risk aversion under asymmetric information and lack of enforceability of contracts. Income sharing inside the group is decided by majority voting and the size of the group adjusts to this decision through participation constraints. At equilibrium, all group members agree on the same imperfect level of income sharing, which yields a constrained-efficient equilibrium. Comparative statics on the risk faced by the community provide interesting results. A mean preserving spread of income implies more income sharing and a larger group size. New members, and possibly even old members may be better o¤, while non-members are worse-o¤. These results have relevant policy implications.

Pages: 27 pages
Date: 2011-05
New Economics Papers: this item is included in nep-cdm, nep-cta, nep-ias and nep-mfd
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Downloads: (external link) First version, 2011 (application/pdf)

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