Consumption Risk-Sharing in Social Networks

By Attila Ambrus, Markus Mobius, Adam Szeidl. 2014

319 citations recorded by the source corpus.

We develop a model of informal risk-sharing in social networks, where relationships between individuals can be used as social collateral to enforce insurance payments. We characterize incentive compatible risk-sharing arrangements and obtain two results. (1) The degree of informal insurance is governed by the expansiveness of the network, measured by the number of connections that groups of agents have with the rest of the community, relative to group size. Two-dimensional networks, where people have connections in multiple directions, are sufficiently expansive to allow very good risk-sharing. We show that social networks in Peruvian villages satisfy this dimensionality property; thus, our model can explain Townsend's (1994) puzzling observation that village communities often exhibit close to full insurance. (2) In second-best arrangements, agents organize in endogenous "risk-sharing islands" in the network, where shocks are shared fully within, but imperfectly across islands. As a result, network based risk-sharing is local: socially closer agents insure each other more.

Subfields: Economics and Econometrics, Sociology and Political Science, Soil Science

View Paper: https://www.semanticscholar.org/paper/0c942de5e70f82291551e656f71f9bf25ed4a755

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Citations in the corpus

Kinship and Financial Networks, Formal Financial Access, and Risk Reduction (2012, background): “Ambrus et al. (2010) and Karlan et al. (2009) argue that, in the absence of formal commitment, networks that generate the most surplus for their members can sustain the largest flows of funds.”
Financing from Family and Friends (2016, unknown): “Indeed, ample empirical evidence shows that intra-family transfers among the poor help smooth consumption (e.g., Udry, 1996) and provide insurance (Ambrus et al., 2010), quite the opposite of providing funds to take on risky ventures.”
Group versus individual liability: Short and long term evidence from Philippine microcredit lending groups (2014, unknown): “For other examples, seeAmbrus et al. (forthcoming), Attanasio et al. (2012) and Giné et al. (2010). likelihood of repaying.”
Social Networks and the Decision to Insure (2015, background): “…of social networks, this paper adds 1 Existing studies have linked social networks to a wide range of activities, including risk sharing (Ambrus et al. (2010)), political outcomes (Galeotti and Mattozzi (2011)), labor market and job satisfaction (Beaman (2011); Fogli and Veldkamp…”
Changes in Social Network Structure in Response to Exposure to Formal Credit Markets (2021, unknown): “(2008), Ambrus et al .”
The Economic Consequences of Social Network Structure (2017, background): “…to money transfers and loan repayments (Karlan, Mobius, Rosenblat, and Szeidl (2009, 2010); Blumenstock, Eagle and Fafchamps (2011); Alatas et al. (2016)) as well as risk-sharing (Bloch, Genicot, and Ray (2008), Ambrus, Mobius, and Szeidl (2014), Alatas et al. (2016), Mobius and Rosenblat (2016)).”