Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies

Ligon, Ethan; Worrall, Tim; Thomas, Jonathan

doi:10.2139/ssrn.1776648

Cited by 131 publications

(165 citation statements)

References 39 publications

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“…If they take finitely many values, the equilibrium can be characterized by a finite system of equations, it can typically be computed easily and, one can conduct local comparative statics using the implicit function theorem. Ligon et al (2002) show that in limited enforcement models finite support equilibria always exist if there are two agents. However, in those models equilibrium allocations are constrained efficient and can be obtained as the solution of a convex programming problem.…”

Section: Stationarity Properties Of Equilibriamentioning

confidence: 94%

“…We refer for convenience in what follows to these models as "limited enforcement models". As shown in Kehoe and Levine (2001), Ligon et al (2002), and Alvarez and Jermann (2000), these models are quite tractable since competitive equilibria can be written as the solution to a planner's problem subject to appropriate constraints. Even though this is not true in the environment considered here -the limited commitment constraint has a different nature and we show that competitive equilibria may be constrained inefficient -tractability is still obtained.…”

Section: Introductionmentioning

confidence: 99%

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Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Gottardi

Kübler

2015

Review of Economic Studies

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In this article we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset pay-offs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow-Debreu markets subject to a series of limited pledgeability constraints. We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable. Abstract In this paper we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset payoffs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow-Debreu markets subject to a series of limited pledgeability constraints.We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off.We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable. * We thank seminar participants at various universities and conferences and in particular Arpad Abraham,

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Section: Stationarity Properties Of Equilibriamentioning

confidence: 94%

Section: Introductionmentioning

confidence: 99%

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Gottardi

Kübler

2015

Review of Economic Studies

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“…Fafchamps (2001) discusses the persistence of inequality and patronage linked to risk-sharing arrangements. Another part of the theory literature has been on the nature and sustainability of (partial or complete) risk-sharing arrangements given the lack of formal enforcement (Coate and Ravallion 1993, Platteau 1997, Ligon et al 2001, Attanasio and Rios-Rull 2000. Ligon et al (2001) show evidence that the constrained risk-sharing model fits the ICRISAT-data for India better.…”

Section: Informal Risk-sharing and Safety Netsmentioning

confidence: 99%

“…Also, if some households in the network have access to a new source of risk reduction or protection, then the arrangement may come under pressure. Sometimes renegotiating the reciprocal arrangement may allow the arrangement to continue, albeit on other terms; alternatively, the arrangement may break down (Platteau 1997, Ligon et al 2001). …”

Section: Informal Risk-sharing and Safety Netsmentioning

confidence: 99%

Income Risk, Coping Strategies, and Safety Nets

Dercon

2002

The World Bank Research Observer

787

545

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High income risk is part of life in developing countries. Climatic risks, economic fluctuations, but also a large number of individual-specific shocks make these households vulnerable to serious hardship. For example, details are given on the various shocks and events causing serious hardship to rural households in Ethiopia in the last twenty years. Not surprisingly for Ethiopia, climatic events are the most common cause of shocks, but many households suffer from other common or idiosyncratic shocks related to economic policy, labour or livestock.Rural and urban households in developing countries face substantial risk. Households in risky environments have developed sophisticated (ex ante) risk-management and (ex post) risk-coping strategies, including self-insurance via savings and informal insurance mechanisms while formal credit and insurance markets appear to contribute only little to reducing income risk and its consequences. Despite these strategies, vulnerability to poverty linked to risk remains high. In this paper, I focus on the opportunities available to households to use risk-management and risk-coping strategies, and on the constraints on their effectiveness, by reviewing some of the recent literature on savings as insurance, income diversification and smoothing, and informal risk-sharing arrangements. Risk and lumpiness limit the opportunities to use assets as insurance. Entry constraints limit the usefulness of income diversification. Informal risk-sharing only provides limited protection, especially for some of the poor and their sustainability during periods of change is in doubt. Public safety nets are likely to be beneficial, but their impact is at times limited while they may have negative externalities on households not covered by the safety net. The paper also discusses the implications for policy as well as the information requirements to increase our understanding of vulnerability and implement better vulnerability reducing policies.

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“…Limited Commitment. Finally, we turn our attention to another dynamic model, but one in which the relevant friction is limited commitment, as in Kocherlakota (1996) or Ligon et al (2002), and discussed at length in Platteau (1997). In this model, households make risk-sharing arrangements, but the institutions to enforce these contracts are missing or imperfect, so that any household can choose to renege on the mutual insurance arrangement ex post.…”

Section: 2mentioning

confidence: 99%

Targeting and Informal Insurance

Ligon¹

2004

Insurance Against Poverty

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Abstract. The standard method of testing for efficient risk-sharing in village economies (Townsend, 1994) doesn't allow one to identify vulnerable households, only to make statements about the average risk in the village, or of sub-groups identifiable on the basis of observables. Here, by working directly with inter-household consumption correlations we're able to identify households which are probably exposed to unusually high amounts of idiosyncratic risk. An obvious use for this identifying information involves targeted interventions to help those households. However, the effectiveness of these interventions depends on the market imperfections which exposes those households to idiosyncratic risk to begin with. Using data from the Indian ICRISAT villages, we trace out the expected outcomes of targeted income transfers given several different hypotheses regarding why some households bear idiosyncratic risk.

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Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies

Cited by 131 publications

References 39 publications

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Income Risk, Coping Strategies, and Safety Nets

Targeting and Informal Insurance

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