The Formation of Risk Sharing Networks

Marcel Fafchamps, Flore Gubert, IRD-Paris and Dial

No GPRG-WPS-037, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper examines the endogenous formation of risk sharing networks in the rural Philippines. We show that geographic proximity is a major determinant of interpersonal relationships. We find little evidence that people form relationships to pool income risk. The existence of a pre-existing relationship between two individuals is a major determinant of subsequent gifts and informal loans between them, controlling for other proximity factors. From this we conclude that these transfers and informal loans are embedded in interpersonal relationships. These relationships are largely determined by proximity factors and are only weakly the result of purposeful diversification of income risk. There is, however, some evidence that the formation of risk sharing links is aimed at pooling health risk. The paper also makes a methodological contribution to the estimation of dyadic models.

Date: 2005-12-01
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Journal Article: The formation of risk sharing networks (2007)
Working Paper: The Formation of Risk Sharing Networks (2005)
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