Voluntary Contributions to a Mutual Insurance Pool

Abstract

International audienceWe study mutual-aid games in which individuals choose to contribute to an informal mutual insurance pool. Individual coverage is determined by the aggregate level of contributions and a sharing rule. We analyze theoretically and experimentally the (ex ante) efficiency of equal and contribution-based coverage. The equal coverage mechanism leads to a unique no-insurance equilibrium while contribution-based coverage develops multiple equilibria and improves efficiency. Experimentally, the latter treatment reduces the amount of transfers from high contributors to low contributors and generates a \dual interior equilibrium". That dual equilibrium is consistent with the co-existence of different prior norms which correspond to notable equilibria derived in the theory. This results in asymmetric outcomes with a majority of high contributors less than fully reimbursing the global losses and a significant minority of low contributors less than fully defecting. Such behavioral heterogeneity may be attributed to risk attitudes (risk tolerance vs risk aversion) which is natural in a risky context

Cooperation in a risky world

“…Thus, our experimental paradigm provides a simple way to capture the distinction between local and global environmental risks that are important in various real‐world public good settings . Our experiment complements the previous work by Lévy‐Garboua, Montmarquette, Vaksmann, and Villeval (), who study cooperation in building a common insurance pool. In their design, agents face the risk of losing their resources and ex ante may voluntarily fund a group insurance scheme to help the needy members recover their losses.…”

Warm glow and the transmission of pro‐socialness across generations

“…The literature on voluntary contributions to a public goods has many applications, such as mutual insurance pools (Levy‐Garboua, Montmarquette, Valksmann, & Villeval, ) and anonymous contributors (Maldonado & Rodrigues‐Neto, ), and has been enriched by the theory of clubs (Wooders, ) and by additional considerations such as group structure (Lind, ) and public norm enforcement (Buchholz, Falkinger, & Rübbelke, ).…”

Bergstrom, Blume, and Varian: Voluntary contributions and neutrality

“…The model has been applied in environmental economics to analyze green markets (Kotchen, ) and global environmental problems (Buchholz & Konrad, ; Murdoch & Sandler, ). Johnson () used the model to study open source software and Lévy‐Garboua, Montmarquette, Vaksmann, and Villeval () to model contributions to a voluntary mutual insurance pool. This is only a small sample of the very many applications.…”