Income Interdependence and Informal Risk Sharing Under the Shadow of the Future

Paan Jindapon, Pacharasut Sujarittanonta and Ajalavat Viriyavipart ()

No 191, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: We propose a framework to analyze the effects of income interdependence between two players on risk sharing without commitment. In theory, the likelihood that an informal risksharing agreement is self-enforcing decreases with income correlation. We tested this prediction in the laboratory with negative, zero, and positive correlation coefficients and observed the largest average transfer in the positive-correlation treatment. This surprising result suggests that experiencing the same state of income could create a social bond and induce altruism between the two players. Therefore, informal risk sharing can be successful in a group with social identity despite high income correlation.

Keywords: Risk sharing; Income correlation; Infinite horizon games; Income smoothing; Altruism; Economic experiments (search for similar items in EconPapers)
JEL-codes: C73 C91 D81 O17 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2022-10
New Economics Papers: this item is included in nep-exp and nep-gth
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