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Home > Network-Constrained Risk Sharing in Village Economies

Network-Constrained Risk Sharing in Village Economies

Working paper
Author/s: 
Pau Milan
Issue number: 
912.2016
Series: 
Barcelona GSE Working Paper
Publisher: 
Barcelona Graduate School of Economics
Year: 
2016
Working Paper [1]
In this paper I investigate mutual insurance arrangements restricted on a social network. My approach solves for Pareto-optimal sharing rules in a situation where exchanges are limited within a given social network. I provide a formal description of the sharing rule between any pair of linked households as a function of their network position. I test the theory on a unique data set of indigenous villages in the Bolivian Amazon, during the years 2004 to 2009. I find that the observed exchanges across families match the network-based sharing rule, and that the theory can account for the deviation from full insurance observed in the data. I argue that this framework provides a reinterpretation of the standard risk sharing results, predicting household heterogeneity in response to income shocks. I show that this network-based variation in consumption behavior is borne out in the data, and that it can be interpreted economically in terms of consumption volatility.
Tags: 
Social Choice [2]
Trade Theory [3]

Source URL:http://www.coalitiontheory.net/content/network-constrained-risk-sharing-village-economies

Links
[1] http://research.barcelonagse.eu/file/5150/download?token=VivYMHrc [2] http://www.coalitiontheory.net/research-areas/social-choice [3] http://www.coalitiontheory.net/research-areas/trade-theory