Contract Design in Insurance Groups

Stefan Dercon and Tessa Bold

No 421, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: In many rural settings, informal mutual support networks have evolved into semiformal insurance groups, such as funeral societies. Using detailed panel data for six villages in Ethiopia, we can distinguish two types of contracts, in terms of whether payments are only made at the time of death or savings are accumulated by the group based on premiums paid ex-ante. We characterize these contracts as the coalition-proof equilibria of a symmetric and stationary risk-sharing game, and we show numerically that a contract with savings makes higher demands on enforceability, leading to less cohesive groups finding it in their interest to choose the contract without savings and that coalition-proofness is a necessary condition for the coexistence of both contract types. We show in the data that the type of contract chosen by groups is correlated with the level of trust and other enforcement improving factors. We also predict that among the observed contracts, those with group-based savings and ex-ante payments will attain higher welfare in terms of consumption smoothing than those observed using no group savings. Using panel data, and controlling for household fixed effects and time-varying village level fixed effects, we show that funeral groups are vehicles for risk-sharing and that contract type matters for performance in line with these predictions. The results appear robust to endogeneity of group formation and endogenous selection into contract types.

Keywords: Insurance; Savings; Coalition formation (search for similar items in EconPapers)
JEL-codes: D02 D12 D86 O12 (search for similar items in EconPapers)
Date: 2009-01-01
New Economics Papers: this item is included in nep-ias, nep-mfd and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://ora.ox.ac.uk/objects/uuid:2aa748a6-357c-4ba2-b03c-4ec117ea3d9c (text/html)

Related works:
Working Paper: Contract Design in Insurance Groups (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oxf:wpaper:421

Access Statistics for this paper

More papers in Economics Series Working Papers from University of Oxford, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Anne Pouliquen ( this e-mail address is bad, please contact ).