NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Matt L. Elliott

Division of the Humanities and Social Sciences 228
California Institute of Technology
Pasadena, California 91125

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NBER Working Papers and Publications

November 2014Social Investments, Informal Risk Sharing, and Inequality
with Attila Ambrus, Arun G. Chandrasekhar: 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.
 
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