TY  - JOUR
AU  - Ambrus,Attila
AU  - Mobius,Markus
AU  - Szeidl,Adam
TI  - Consumption Risk-sharing in Social Networks
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15719
PY  - 2010
Y2  - February 2010
UR  - http://www.nber.org/papers/w15719
L1  - http://www.nber.org/papers/w15719.pdf
N1  - Author contact info:
Attila Ambrus
Department of Economics
Duke University
213 Social Sciences Building
419 Chapel Drive, Campus Box 90097
Durham, NC 27708
Tel: 919-660-1835
Fax: 919-681-7984
E-Mail: aa231@duke.edu

Markus Mobius
Department of Economics
Iowa State University
460A Heady Hall
Ames, IA 50011
Tel: (515) 257-6233
Fax: (515) 294-0221
E-Mail: mobius@fas.harvard.edu

Adam Szeidl
Department of Economics
University of California, Berkeley
517 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/642-2603
Fax: 510/642-6615
E-Mail: szeidl@econ.berkeley.edu
AB  - 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.
ER  -