American Economic Review: Vol. 104 No. 1 (January 2014)


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Consumption Risk-Sharing in Social Networks

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Ambrus, Attila, Markus Mobius, and Adam Szeidl. 2014. "Consumption Risk-Sharing in Social Networks." American Economic Review, 104(1): 149-82.

DOI: 10.1257/aer.104.1.149


We develop a model in which connections between individuals serve as social collateral to enforce informal insurance payments. We show that: (i) The degree of insurance is governed by the expansiveness of the network, measured with the per capita number of connections that groups have with the rest of the community. "Two-dimensional" networks—like real-world networks in Peruvian villages—are sufficiently expansive to allow very good risk-sharing. (ii) In second- best arrangements, insurance is local: agents fully share shocks within, but imperfectly between endogenously emerging risk-sharing groups. We also discuss how endogenous social collateral affects our results.

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Ambrus, Attila (Duke U)
Mobius, Markus (U MI and Microsoft Research)
Szeidl, Adam (Central European U, Budapest)

JEL Classifications

D85: Network Formation and Analysis: Theory
G22: Insurance; Insurance Companies; Actuarial Studies
O15: Economic Development: Human Resources; Human Development; Income Distribution; Migration
O17: Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
Z13: Economic Sociology; Economic Anthropology; Social and Economic Stratification

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