Consumption Risk-sharing in Social Networks
Markus Mobius () and
No 15719, NBER Working Papers from National Bureau of Economic Research, Inc
We develop a model of informal risk-sharing in social networks, where relationships between individuals can be used as social collateral to enforce insurance payments. We characterize incentive compatible risk-sharing arrangements and obtain two results. (1) The degree of informal insurance is governed by the expansiveness of the network, measured by the number of connections that groups of agents have with the rest of the community, relative to group size. Two-dimensional networks, where people have connections in multiple directions, are sufficiently expansive to allow very good risk-sharing. We show that social networks in Peruvian villages satisfy this dimensionality property; thus, our model can explain Townsend's (1994) puzzling observation that village communities often exhibit close to full insurance. (2) In second-best arrangements, agents organize in endogenous "risk-sharing islands" in the network, where shocks are shared fully within, but imperfectly across islands. As a result, network based risk-sharing is local: socially closer agents insure each other more.
JEL-codes: D02 D31 D70 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-gth, nep-ias, nep-net, nep-soc and nep-ure
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Published as Ambrus A, Mobius M, Szeidl A. Consumption Risk-sharing in Social Networks. American Economic Review. 2014;104(1):149-82.
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Journal Article: Consumption Risk-Sharing in Social Networks (2014)
Working Paper: Consumption Risk-sharing in Social Networks (2007)
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