Social Investments, Informal Risk Sharing, and Inequality

Attila Ambrus, Arun Chandrasekhar and Matt Elliott

No 20669, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies costly network formation in the context of risk sharing. Neighboring agents negotiate agreements as in Stole and Zwiebel (1996), which results in the social surplus being allocated according to the Myerson value. We uncover two types of inefficiency: overinvestment in social relationships within group (e.g., caste, ethnicity), but underinvestment across group. We find a novel tradeoff between efficiency and equality. Both within and across groups, inefficiencies are minimized by increasing social inequality, which results in financial inequality and increasing the centrality of the most central agents. Evidence from 75 Indian village networks is congruent with our model.

JEL-codes: C78 D31 D61 D86 L14 Z13 (search for similar items in EconPapers)
Date: 2014-11
New Economics Papers: this item is included in nep-gth, nep-net, nep-soc and nep-ure
Note: DEV POL
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Citations: View citations in EconPapers (1)

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