Department of Economics
213 Social Sciences Building
419 Chapel Drive, Campus Box 90097
Durham, NC 27708
NBER Working Papers and Publications
|November 2014||Social Investments, Informal Risk Sharing, and Inequality|
with Arun G. Chandrasekhar, Matt Elliott: w20669
This paper studies costly network formation in the context of risk sharing. Neighboring agents negotiate agreements as in Stole and Zwiebel (1996), which results in the social surplus being allocated according to the Myerson value. We uncover two types of inefficiency: overinvestment in social relationships within group (e.g., caste, ethnicity), but underinvestment across group. We find a novel tradeoff between efficiency and equality. Both within and across groups, inefficiencies are minimized by increasing social inequality, which results in financial inequality and increasing the centrality of the most central agents. Evidence from 75 Indian village networks is congruent with our model.
|February 2010||Consumption Risk-sharing in Social Networks|
with Markus Mobius, Adam Szeidl: w15719
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 clos...
Published: Ambrus A, Mobius M, Szeidl A. Consumption Risk-sharing in Social Networks. American Economic Review. 2014;104(1):149-82. citation courtesy of