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The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan

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Informal Insurance Networks

Wayne Yuan Gao / Eunyoung Moon
Published Online: 2016-03-25 | DOI: https://doi.org/10.1515/bejte-2015-0006


This paper develops a model of risk sharing in which each individual’s income shock is locally shared ex-post given an ex-ante strategically formed network. Emphasizing the informational constraint of the network such that transfers can only be contingent on local information, the model provides characterizations of the ex-ante efficient network and the pairwise stable networks. While it is no surprise that the unique efficient network is the complete graph, it is interesting that any pairwise stable network features low average degree and almost 2-regular structures, even under individual risk heterogeneity, and it tends to exhibit positive assortativity in terms of risk variances. If expected incomes are also locally shared in addition to income shocks, the pairwise stable network may become more densely connected, achieving efficiency under certain parameter values.

Keywords: network; informal insurance; risk sharing; pairwise stability

JEL: D85; O12; O17


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About the article

Published Online: 2016-03-25

Published in Print: 2016-06-01

Citation Information: The B.E. Journal of Theoretical Economics, Volume 16, Issue 2, Pages 455–484, ISSN (Online) 1935-1704, ISSN (Print) 2194-6124, DOI: https://doi.org/10.1515/bejte-2015-0006.

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