Incentive for risk sharing and trust formation: experimental and survey evidence from Bangladesh

Abstract

Although interpersonal trust is essential for socioeconomic development, the formation mechanism of trust is not well understood. Using dyadic data from an experiment and a household survey in rural Bangladesh, this study evaluates whether the incentive for risk sharing increases trust between villagers. Incentive for risk sharing in the dyad is characterized by their negative income correlation, large difference in their risk preferences, and large difference in their income volatilities. The empirical results demonstrate supporting evidence for this hypothesis: incentive for risk sharing, particularly negative income correlation, facilitates trust. These findings suggest that the introduction of safety net programs such as health insurance, which reduce the incentive for risk sharing, may break down trust. This implication could make an important contribution to our understanding of the effect of industrialization on social capital-an effect that has long been discussed.

Social Capital Encourages Disaster Evacuation: Evidence from a Cyclone in Bangladesh

“…There are two challenges in measuring social capital. First, while the level of social capital could change over time, especially following the experience of a disaster (Cassar et al 2017, Shoji 2018a, 2018b, our survey was conducted only once after the cyclone. As such, empirical analyses using the post-cyclone social capital may be biased.…”

“…Regarding the second social capital measure, previous studies suggest that a higher incentive for cooperation leads to higher trust among the community members (Banfield 1958;Durante 2009;Gneezy et al 2016;Shapiro et al 1992;Shoji 2018a;Shoji et al 2012). Hence, we characterize an incentive for risk-sharing arrangement since it is a major opportunity of cooperation in rural economies (Fafchamps 2011).…”

“…First, our dataset contains information on labor income and experience of negative shocks (such as flood and drought) for eight periods since the dry season of 2007 until the rainy season of 2010. 3 Following Albarran and Attanasio (2003) and Shoji (2018a), we regress the seasonal income on the household fixed effects and indicators of negative shocks (Table A3). We define the component of income explained by the negative shocks as unexpected income or UnexpInc.…”

Hiding behind the veil of ashes: Social capital in the wake of natural disasters

“…First, we asked individuals about their trust in relatives and neighbors. While interpersonal trust is arguably multidimensional, one of its dimension covers risk sharing and social support (Shoji 2018). Our second measure, network size, is the number of people ready to give money if needed.…”