Group Formation in Risk-Sharing Arrangements

Abstract

We study informal insurance within communities, explicitly recognizing the possibility that subgroups of individuals may destabilize insurance arrangements among the larger group. We therefore consider self-enforcing risk-sharing agreements that are robust not only to single-person deviations but also to potential deviations by subgroups. However, such deviations must be credible, in the sense that the subgroup must pass exactly the same test that we apply to the entire group; it must itself employ some self-enforcing risk-sharing agreement. We observe that the stability of subgroups is inimical to the stability of the group as a whole. Two surprising consequences of this analysis are that stable groups have (uniformly) bounded size, a result in sharp contrast to the individual-deviation problem, and that the degree of risk-sharing in a community is generally non-monotonic in the level of uncertainty or need for insurance in the community.

Optimal dynamic risk sharing when enforcement is a decision variable

“…Kocherlakota (1996) characterizes efficient risk sharing by relying on reversion to autarky as the appropriate punishment if an agent reneges on a risk sharing arrangement: Autarky is a credible punishment in the sense that it characterizes the set of subgame-perfect allocations in bilateral risk sharing environments. 2 More recently, Genicot and Ray (2003) extend these results to a framework of risk sharing within coalitions of agents. This paper goes further than this existing literature by studying how agents choose optimally between internal incentives or incentives provided through enforcement by a third party from outside the relationship.…”

Persistent poverty and informal credit

“…Genicot and Ray (2003) likewise suggest that insurance groups may be bounded because risk-sharing arrangements need to be robust to defection by sub-groups. 13 Although these authors do not explicitly model wealth as a source of friction that might prevent credit links from forming, they offer complementary explanations for the behavior that we observe.…”

Economic analysis of resilience: A framework for local policy response based on new case studies

“…These papers address the question of whether we can expect "chunky" insurance arrangements to arise in an organic sense and remain stable. Genicot and Ray, 2003, note that there can be theoretical -strategic --reasons for mutual insurance groups to remain small quite apart from Murgai et al's 2002 transaction cost reasons. Genicot and Ray investigate insurance arrangements that are required to be stable to "defections" by groups of insured individuals who may depart to form their own mutual insurance arrangements.…”

“…In a homogeneous population model of the type described above, Genicot and Ray, 2003, note that the larger the group the higher the per capita utility from risk sharing so that one would expect that efficient insurance arrangements should be observed at the level of the community as a whole. However, they comment that this is at direct odds with the observation that most insurance arrangements in communities (of the type in our case studies) are not at a community level.…”