Informal Insurance and Income Inequality

Sarolta Laczó ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the effects of income inequality in a risk sharing model with limited commitment, that is, when insurance agreements have to be self-enforcing. In this context, numerical dynamic programming is used to examine three questions. First, I consider heterogeneity in mean income, and study the welfare effects when inequality together with aggregate income increases. Second, subsistence consumption is introduced to see how it affects consumption smoothing. Finally, income is endogenized by allowing households to choose between two production technologies, to look at the importance of consumption insurance for income smoothing.

Keywords: risk sharing; limited commitment; inequality; technology choice; developing countries (search for similar items in EconPapers)
JEL-codes: D80 I30 O12 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-dev, nep-dge and nep-ias
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:7197

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